Annual Securities Report
Annual Securities Report
for the fiscal year ended March 31, 2018
Certain References and Information
This report is prepared for overseas investors and compiled based on contents of the Annual Securities Report (“Yukashoken Hokokusho”) of Mitsui & Co., Ltd. filed with the Director-General of the Kanto Local Finance Bureau of the Ministry of Finance of Japan on June 21, 2018.
As used in this report, “Mitsui” is used to refer to Mitsui & Co., Ltd. (Mitsui Bussan Kabushiki Kaisha), “we,” “us,” and “our” are used to indicate Mitsui & Co., Ltd. and subsidiaries, unless otherwise indicated. “Share” means one share of Mitsui’s common stock, “ADS” means an American Depositary Share representing 20 shares, and “ADR” means an American Depositary Receipt evidencing one or more ADSs. Also, “dollar” or “$” means the lawful currency of the United States of America, and “yen” or “¥” means the lawful currency of Japan.
All financial statements and information contained in this report have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board except where otherwise noted.
A Cautionary Note on Forward-Looking Statements This report includes forward-looking statements based on our current expectations, assumptions, estimates and projections about our business, our industry and capital markets around the world. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “may,” “expect,” “anticipate,” “estimate,” “forecast,” “plan” or similar words. The forward- looking statements in this report are subject to various risks, uncertainties and assumptions. These statements discuss future expectations, identify strategies, contain projections of results of operations or of our financial position, or state other forward-looking information. Known and unknown risks, uncertainties and other factors could cause our actual operating results to differ materially from those contained or implied in any forward-looking statement. Our expectations expressed in these forward-looking statements may not turn out to be correct, and our actual results could materially differ from and be worse than our expectations.
Important risks and factors that could cause our actual results to differ materially from our expectations are discussed in “2. Operating and Financial Review and Prospects, 2. Risk Factors” or elsewhere in this report and include, without limitation:
• changes in economic conditions that may lead to unforeseen developments in markets for products handled by us; • fluctuations in currency exchange rates that may cause unexpected deterioration in the value of transactions; • adverse political developments in the various jurisdictions where we operate, which among things, may create delays or postponements of transactions and projects; • changes in laws, regulations or policies in any of the countries where we conduct our operations; and • significant changes in the competitive environment.
We do not assume, and specifically disclaim, any obligation to update any forward-looking statements which speak only as of the date made.
CONTENTS
Page 1. Overview of Mitsui and Its Subsidiaries …………………………………………………………………………… 1 1. Selected Financial Data …………………………………………………………………………………………… 1 2. History ……………………………………………………………………………………………………………… 3 3. Business Overview ………………………………………………………………………………………………… 4 4. Affiliated Companies ……………………………………………………………………………………………… 7 5. Employees ………………………………………………………………………………………………………… 16 2. Operating and Financial Review and Prospects …………………………………………………………………… 17 1. Management Policies, Operating Environment, and Management Issues ………………………………………… 17 2. Risk Factors ………………………………………………………………………………………………………… 28 3. Management’s Discussion and Analysis of Financial Position, Operating Results and Cash Flows ……………… 35 4. Material Contracts ………………………………………………………………………………………………… 56 5. Research & Development ………………………………………………………………………………………… 56 3. Equipment and Facilities …………………………………………………………………………………………… 57 1. Overview of Capital Expenditures ………………………………………………………………………………… 57 2. Major Equipment and Facilities …………………………………………………………………………………… 57 3. Plans for New Additions or Disposals ……………………………………………………………………………… 60 4. Corporate Information ……………………………………………………………………………………………… 61 1. Status on the Mitsui’s Shares ……………………………………………………………………………………… 61 (1) Total Number of Shares and Other Related Information …………………………………………………………… 61 (2) Status of the Share Subscription Rights …………………………………………………………………………… 62 (3) Exercise Status of Bonds with Share Subscription Rights Containing a Clause for Exercise Price Adjustment … 69 (4) Trends in the Number of Shares Issued, Amount of Common Stock, and Others ………………………………… 69 (5) Status of Shareholders ……………………………………………………………………………………………… 69 (6) Status of Major Shareholders ……………………………………………………………………………………… 70 (7) Status of Voting Rights …………………………………………………………………………………………… 71 2. Acquisition of Treasury Stock and Other Related Status ………………………………………………………… 72 3. Shareholder Return Policy ………………………………………………………………………………………… 73 4. Trends in the Market Price of Mitsui’s Shares …………………………………………………………………… 74 5. Members of the Board of Directors and Audit & Supervisory Board Members …………………………………… 75 6. Corporate Governance ……………………………………………………………………………………………… 82 5. Financial Information ……………………………………………………………………………………………… 109 1. Consolidated Financial Statements ………………………………………………………………………………… 109 2. Others ……………………………………………………………………………………………………………… 176 6. Outline Regarding the Administration of Mitsui’s Stock ………………………………………………………… 177 7. Reference Information on Mitsui …………………………………………………………………………………… 178 1. Information on the Parent Company ……………………………………………………………………………… 178 2. Other Reference Information ……………………………………………………………………………………… 178 Independent Auditor’s Report Management’s Annual Report on Internal Control over Financial Reporting (Translation) Independent Auditor's Report (filed under the Financial Instruments and Exchange Act of Japan)
1. Overview of Mitsui and Its Subsidiaries
1. Selected Financial Data
IFRS
Fiscal year 99th 98th 97th 96th 95th
March 31, March 31, March 31, March 31, March 31, Year ended 2018 2017 2016 2015 2014
Consolidated financial data (Millions Revenue 4,892,149 4,363,969 4,759,694 5,404,930 5,731,918 of Yen) (Millions Gross profit 790,705 719,295 726,622 845,840 880,106 of Yen) Profit (loss) for the year (Millions 418,479 306,136 (83,410) 306,490 350,093 attributable to owners of the parent of Yen) Comprehensive income for the (Millions year attributable to owners of the 416,113 503,025 (607,490) 406,583 521,457 of Yen) parent Total equity attributable to owners (Millions 3,974,715 3,732,179 3,379,725 4,099,795 3,815,767 of the parent of Yen) (Millions Total assets 11,306,660 11,501,013 10,910,511 12,202,921 11,491,319 of Yen) Equity attributable to owners of (Yen) 2,287.10 2,115.80 1,885.47 2,287.17 2,128.73 the parent per share Basic earnings per share (Yen) 237.67 171.20 (46.53) 170.98 192.22 attributable to owners of the parent Diluted earnings per share (Yen) 237.50 171.10 (46.54) 170.95 192.21 attributable to owners of the parent Equity attributable to owners of (%) 35.15 32.45 30.98 33.60 33.21 the parent ratio Return on Equity (ROE) (%) 10.86 8.61 (2.23) 7.74 9.65
Price Earnings Ratio (PER) (Times) 7.67 9.42 - 9.43 7.59 Cash flows from operating (Millions 553,645 404,171 586,991 639,967 449,243 activities of Yen) Cash flows from investing (Millions (248,211) (353,299) (408,059) (386,397) (659,818) activities of Yen) Cash flows from financing (Millions (652,292) (50,265) (50,548) (126,193) (13,237) activities of Yen) Cash and cash equivalents at end (Millions 1,131,380 1,503,820 1,490,775 1,400,770 1,226,317 of year of Yen) Number of employees (Number 42,304 42,316 43,611 47,118 48,090 (excluding average number of part of persons) -time employees) (11,984) (9,988) (10,784) (11,139) (12,570) (Notes) 1. The consolidated financial statements have been prepared on the basis of International Financial Reporting Standards (IFRS) from the 95th fiscal year. 2. Revenue do not include consumption taxes. 3. Price Earnings Ratio (PER) in the 97th fiscal year is not disclosed as earnings per share is loss.
1
U.S. GAAP
Fiscal year 95th
March 31, Year ended 2014
Consolidated financial data (Millions Revenues 5,740,650 of Yen) Income from continuing (Millions operations before income taxes 453,732 of Yen) and equity in earnings Net income attributable to Mitsui (Millions 422,161 & Co., Ltd. of Yen) Comprehensive income (Millions 549,238 attributable to Mitsui & Co., Ltd. of Yen) Total Mitsui & Co., Ltd. (Millions 3,586,414 shareholders’ equity of Yen) (Millions Total equity 3,868,066 of Yen) (Millions Total assets 11,001,264 of Yen) Shareholders’ equity per share (Yen) 2,000.78 Basic net income attributable to (Yen) 231.79 Mitsui & Co., Ltd. per share Diluted net income attributable to (Yen) 231.78 Mitsui & Co., Ltd. per share Shareholders’ equity ratio (%) 32.60
Return on Equity (ROE) (%) 12.47
Price Earnings Ratio (PER) (Times) 6.29 Cash flows from operating (Millions 521,524 activities of Yen) Cash flows from investing (Millions (704,516) activities of Yen) Cash flows from financing (Millions (34,698) activities of Yen) Cash and cash equivalents at end (Millions 1,225,079 of year of Yen) Number of employees (Number 48,090 (excluding average number of part of persons) -time employees) (12,570) (Notes) 1. The consolidated financial statements prepared on the basis of accounting principles generally accepted in the United States of America (U.S. GAAP) in the 95th fiscal year is unaudited financial information pursuant to the first paragraph of Article 193-2 of the Financial Instruments and Exchange Act. 2. “Shareholders’ equity” or “equity” in shareholders’ equity per share, shareholders’ equity ratio and return on equity (ROE) in the above table refers to “Total Mitsui & Co., Ltd. shareholders’ equity” in the consolidated balance sheets. 3. Revenues do not include consumption taxes.
2 2. History
Mitsui Bussan Kabushiki Kaisha (“Mitsui & Co., Ltd.” in English) was originally incorporated on July 25, 1947, as Daiichi Bussan Kabushiki Kaisha with a common stock of ¥195,000, with the main purpose of importing, exporting and selling a wide variety of products.
Since our establishment, our business results have developed strongly, and we have grown in scale as the result of capital increases or stock dividends, the issuance of foreign currency-denominated and domestic convertible bonds, along with integration with other new companies. On February 16, 1959, we changed our name to our present name of Mitsui Bussan Kabushiki Kaisha (Mitsui & Co., Ltd.), and took the form of a general trading company in both name and practice. From then until the present day, we have continued to expand our business through mergers and acquisitions of other businesses and companies.
The significant developments for the company that occurred during this time, including name changes, mergers, establishment of major affiliated companies, listings on securities exchanges, and other, are as follows.
Jul. 1947 Daiichi Bussan Kabushiki Kaisha established with common stock of ¥195,000 May 1949 Listed on Tokyo Stock Exchange Nov. 1954 Listed on Sapporo Securities Exchange, Nagoya Stock Exchange and Osaka Securities Exchange Apr. 1956 Established Daiichi Bussan Kabushiki Kaisha Australia (currently Mitsui &Co. (Australia), Ltd.) Feb. 1959 Changed the name to Mitsui Bussan Kabushiki Kaisha (Mitsui & Co., Ltd.) Feb. 1959 Listed on Fukuoka Stock Exchange Jan. 1963 Participated in the development of the Moura Coal Mine in Australia (currently the Dawson Coal Mine) May 1963 Issued American Depositary Receipts (ADR) in the U.S. (registered on NASDAQ in U.S. in 1971) Feb. 1965 Decided to participate in Robe River iron mine in Australia Apr. 1966 Established Mitsui & Co. (U.S.A.), Inc. Oct. 1966 Concluded long-term purchase agreement of iron ore from Mount Newman in Australia Mar. 1971 Split off lease business and established Mitsui leasing, Ltd. (currently JA Mitsui Leasing, Ltd.) Sept. 1971 Signed basic agreement on development of Liquefied Natural Gas (LNG) in Das Island, Abu Dhabi Oct. 1971 Signed basic agreement on Iran Petrochemical Project May 1976 Established Aim Services Co., Ltd. with ARA (currently ARAMARK Corporation) Nov. 1976 Moved head office to Otemachi, Chiyoda-ku, Tokyo Jul. 1985 Participated in North West Shelf LNG project in Western Australia Apr. 1988 Established Mitsui & Co. UK PLC (currently Mitsui & Co. Europe PLC) Dec. 1990 Concluded Iran Petrochemical Project due to winding up of Iran Chemical Development Co. Ltd. Oct. 1991 Introduced Chief Operating Officer system Feb. 1994 Established P.T. Paiton Energy, an electric power company in Indonesia Jun. 1994 Signed development contracts (production sharing contract) for the Sakhalin II petroleum and natural gas projects Apr. 2002 Introduced Managing Officer system Mar. 2003 Participated in ownership interest in International Methanol Company of Saudi Arabia Jun. 2003 First appointment of external director Sept. 2003 Purchased ownership interest in Valepar S.A., the holding company of Vale S.A., the Brazilian diversified resource company Apr. 2004 Abolished Domestic Branches and Offices Segment and included them in each business unit by product Apr. 2006 Introduced overseas regional business unit system (currently three overseas regional business unit system) Jun. 2007 Acquired Steel Technologies, Inc., a U.S. steel processing service center Feb. 2010 Decided to participate in the Marcellus Shale Gas production development project in the U.S. Apr. 2011 Delisted from NASDAQ (deregistered from the U.S. Securities and Exchange Commission (the “SEC”) in July 2011) Aug. 2012 Established a strategic alliance with Codelco and participated in a joint venture to jointly hold shares of Anglo American Sur S.A. Nov. 2014 Moved head office to Marunouchi, Chiyoda-ku, Tokyo due to reconstruction of the head office building Aug. 2017 Incorporated Valepar S.A., the holding company, by Vale S.A., the Brazilian diversified resource company
3 3. Business Overview
We are a general trading company engaged in a range of global business activities including worldwide trading of various commodities, arranging financing for customers and suppliers in connection with our trading activities, organizing and coordinating international industrial projects by using the global office network and our ability to gather information. Our business activities include the sale, import, export, offshore trading, production and a wide variety of comprehensive services such as retail, information and telecommunication, technology, logistics and finance in the areas of iron & steel, mineral & metal resources, machinery & infrastructure, chemicals, energy, lifestyle, innovation & corporate development. We also participate in the development of natural resources such as oil, gas, iron and steel raw materials. We have been proactively making strategic business investments in certain new industries such as IT, renewable energy and environmental solution businesses.
The business units of Mitsui’s Head Office, which are organized based on “products and services,” plan overall and worldwide strategies for their products and services and conduct their worldwide operations. The business units also collaborate with overseas branches and overseas trading subsidiaries in planning and executing their strategies for products and regions. The overseas branches and overseas trading subsidiaries are separate operating units, which are delegated responsibility for the business of their regions as the centers of each particular regional strategy and operate diversified businesses together with their subsidiaries and associated companies in collaboration with the business units.
Previously, these headquarters business units and regional business units had been organized into product segments and regional segments. From the fiscal year ended March 31, 2018, however, for the disclosure pursuant to IFRS 8 “Operating Segments,” they are organized into seven product segments based on the properties and characteristics of the products they handle, factoring in managerial decisions relating to allocation of resources and assessment of such operating performance.
We have 472 affiliated companies for consolidation, which consist of 201 overseas subsidiaries, 64 domestic subsidiaries, 165 overseas equity accounted investees and 42 domestic equity accounted investees.
Segment Products or Services Major Subsidiaries Major Equity Accounted Investees
Shanghai Bao-Mit Steel Distribution Co., Ltd., SIAM YAMATO STEEL Steel product for COMPANY LIMITED, Gestamp North Mitsui & Co. Steel Ltd., Bangkok Coil infrastructure projects, America, Inc., Gestamp Holding Mexico, Iron & Steel Center Co., Ltd., Regency Steel Asia Pte Automotive components, S.L., Gestamp Brasil Industria De Ltd., Game Changer Holdings Inc., EURO- Products Steel products used in Autopecas S.A., Gestamp Holding MIT STAAL B.V. energy industry, and others Argentina, S.L., GESTAMP 2020, S.L., GRI Renewable Industries, S.L., GEG (Holdings) Limited Mitsui-Itochu Iron Pty. Ltd., Mitsui Iron Ore Development Pty. Ltd., Mitsui Iron Ore Corporation Pty. Ltd., Mitsui & Co. Iron Ore Exploration & Mining Pty. Ltd., Oriente Copper Netherlands B.V., Japan Collahuasi Resources B.V., Mitsui Bussan Copper Iron ore, Coal, Copper, Inner Mongolia Erdos Electrical Power & Mineral Investment & Co., Ltd., MITSUI BUSSAN Nickel, Alminum, Ferrous Metallurgical Group Limited By Shares, & Metal METALS CO., LTD., Mitsui & Co. Mineral raw materials, Recycling NIPPON AMAZON ALUMINIUM CO., Resources Development (Asia) Corp., Mitsui Resources solutions, and others LTD., BHP Billiton Mitsui Coal Pty Ltd. Coal Holdings Pty. Ltd., Mitsui & Co. Mozambique Coal Investment B.V., Mitsui & Co. Mozambique Coal Finance Limited, Mitsui & Co. Nacala Infrastructure Investment B.V., Mitsui & Co. Nacala Infrastructure Finance Limited
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Segment Products or Services Major Subsidiaries Major Equity Accounted Investees
Mitsui & Co. Plant Systems, Ltd., KARUGAMO ENERGY MANAGEMENT PTY. LIMITED, MIT POWER CANADA LP INC., MITSUI GAS E ENERGIA DO BRASIL LTDA., Mit Investment Toyo Engineering Corporation, P.T. Manzanillo B.V., Drillship Investment B.V., PAITON ENERGY, Compania de MIT Gas Mexico, S. de R.L. de C.V., Generacion Valladolid, S. de R.L. de Ecogen Brasil Solucoes Energeticas S.A., C.V., IPM Eagle LLP, IPM Holdings Mit-Power Capitals (Thailand) Limited, (UK) Limited, MT Falcon Holdings ATLATEC, S.A. de C.V., MyPower Corp., Company, S.A.P.I. de C.V., 3B POWER MIZHA ENERGIA PARTICIPACOES Electric power, Marine SDN. BHD., SAFI ENERGY S.A., Portek International Private Limited, energy, Gas distribution, COMPANY, MAP Power Holding Tokyo International Air Cargo Terminal Water treatment and supply, Company Limited, MAP Inland Holding Machinery Ltd., Mitsui Water Holdings (Thailand) Logistics and social Company Limited, MAP Coastal Holding & Ltd., Toyota Chile S.A., Mitsui Automotriz infrastructure, Automotive, Company Limited, VLI S.A., Penske S.A., MITSUI AUTO FINANCE CHILE Infrastructure Construction, Automotive Group, Inc., HINO LTDA., Veloce Logistica S.A., MBK USA Transportation, Ships, MOTORS SALES (THAILAND) LTD., Commercial Vehicles Inc., HINO MOTORS Aircraft, and others TOYOTA MANILA BAY SALES MEXICO, S.A. DE C.V., PT. CORPORATION, PT. Yamaha Indonesia Bussan Auto Finance, Bussan Auto Finance Motor Manufacturing, India Yamaha India Pvt.Ltd., Komatsu-Mitsui Maquinarias Motor Pvt. Ltd., BAF (Thailand) Co., Peru S.A., Road Machinery, LLC, Ellison Ltd., TAIYOKENKI RENTAL CO., Technologies Inc., MITSUI & CO. LTD, KOMATSU MARKETING MACHINE TECH LTD., Guarana Urban SUPPORT AUSTRALIA PTY LTD Mobility Incorporated, Orient Marine Co., Ltd., OMC SHIPPING PTE. LTD., Mitsui Bussan Aerospace Co., Ltd., Mitsui Rail Capital Holdings, Inc., Mitsui Rail Capital Europe B.V. Japan-Arabia Methanol Company Ltd., MMTX Inc., Shark Bay Salt Pty. Ltd., Mitsui Bussan Chemicals Co., Ltd., MITSUI Petrochemical raw material & CO. PLASTICS LTD., Daito Chemical and products, Inorganic raw ITC RUBIS TERMINAL ANTWERP Co., Ltd., Diana Elastomers, Inc., DAIICHI material and products, NV, HEXAGON COMPOSITES ASA, TANKER CO., LTD., Mitsui AgriScience Chemicals Synthetic resin material and LABIX Company Limited, PT Kingsford International SA/NV, Mitsui AgriScience products, Agricultural Holdings, MVM Resources International International Inc., San-ei Sucrochemical Co., material, Feed additives, B.V. Ltd., Mitsui Bussan Agro Business Co., Tank terminal and others Ltd., Mitsui Agro Business S.A., MITSUI PLASTICS INC., Novus International, Inc., Intercontinental Terminals Company LLC Mitsui Oil Exploration Co., Ltd., Mitsui E&P Middle East B.V., Mitsui E&P Australia Pty Limited, Mitsui E&P UK Oil, Natural gas, LNG, Limited, Mitsui E&P USA LLC, MEP Petroleum products, Texas Holdings LLC, Mitsui E&P Italia A ENEOS GLOBE Corporation, Japan Energy Uranium, Environmental S.r.l., Mitsui & Co. LNG Investment USA Australia LNG (MIMI) Pty. Ltd. and next-generation energy, LLC, Mitsui & Co. Energy Trading and others Singapore Pte. Ltd., Mitsui Sakhalin Holdings B.V., Mitsui E&P Mozambique Area 1 Limited, Mitsui Gas Development Qatar B.V.
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Segment Products or Services Major Subsidiaries Major Equity Accounted Investees
PRIFOODS CO., LTD., TOHO BUSSAN KAISHA, LTD., Paul Stuart, Inc., MITSUI & CO. REAL ESTATE LTD., United Grain Corporation of Oregon, XINGU AGRI AG, FEED ONE CO., LTD., Starzen Co., Multigrain Trading AG, Mitsui Norin Co., Ltd., Mitsui Sugar Co., Ltd., The Ltd., MITSUI ALIMENTOS LTDA., Mit- Kumphawapi Sugar Co., Ltd., AIM Foods, Fashion, Housing Salmon Chile SpA, Mitsui Foods, Inc., SERVICES CO., LTD., ARAMARK and industrial materials, MITSUI FOODS CO., LTD., Bussan Uniform Services Japan Corporation, Lifestyle Real estate, Healthcare, Logistics Solutions Co., Ltd., MITSUI SOGO MEDICAL CO., LTD., Panasonic Outsourcing services, and BUSSAN I-FASHION LTD., VENDOR Healthcare Holdings Corporation, Medica others SERVICE CO., LTD., MBK Real Estate Asia (Holdco) Limited, IHH Healthcare LLC, RETAIL SYSTEM SERVICE CO., Berhad, Fuji Pharma Co., Ltd., SMB LTD., WILSEY FOODS, INC., Mitsui & KENZAI CO., LTD. Co. Foresight Ltd., UHS Partners, Inc., MicroBiopharm Japan Co., Ltd., MAX MARA JAPAN CO., LTD., Mitsui Bussan Woodchip Oceania Pty. Ltd. MITSUI KNOWLEDGE INDUSTRY CO., LTD., Mitsui Bussan Electronics Ltd., Mitsui Bussan Secure Directions, Inc., Asia Asset management, Pacific Mobile Pte. Ltd., Mitsuibussan Leasing, Insurance, Buyout Innovation Insurance Co., Ltd., Mitsui & Co. Global Relia Inc., QVC JAPAN INC., CCTV investment, Venture & Investment Ltd., Mitsui & Co., Principal Shopping Co., Ltd., JA Mitsui Leasing, investement, Commodity Investments Ltd., Mitsui & Co. Asset Ltd., New Ocean Capital Management Corporate derivatives, Logistics Management Holdings LTD., Mitsui Bussan Limited Development center, Information system, Commodities Ltd., Mitsui & Co. Global and others Logistics, Ltd. Mitsui & Co. Alternative Investments Ltd., SABRE INVESTMENTS, LLC
6 4. Affiliated Companies
(1) Parent Company
Mitsui does not have a parent company.
(2) Major Subsidiaries
Jurisdiction Ownership Operating Registered Name Principal Lines of Business of of Voting Segment Incorporation Shares (%) Domestic sales, export, import of steel Mitsui & Co. Steel Ltd. Japan 100.0 products Bangkok Coil Center Co., Ltd. Steel processing Thailand 99.6 Iron & Steel Products Regency Steel Asia Pte Ltd. Wholesale and retail of steel products Singapore 92.5 Game Changer Holdings Inc. Investment in steel processing company U.S.A. 100.0
EURO-MIT STAAL B.V. Steel processing Netherlands 90.0
Mitsui-Itochu Iron Pty. Ltd. Mining and sales of Australian iron ore Australia 70.0 Mitsui Iron Ore Development Pty. Mining and sales of Australian iron ore Australia 100.0 Ltd. Mitsui Iron Ore Corporation Pty. Ltd. Mining and sales of Australian iron ore Australia 100.0 Mitsui & Co. Iron Ore Exploration & Mining and sales of Australian iron ore Australia 100.0 Mining Pty. Ltd. Investment in and loan to copper business in Oriente Copper Netherlands B.V. Chile through Inversiones Mineras Becrux Netherlands 100.0 SpA Investment in Collahuasi copper mine in Japan Collahuasi Resources B.V. Netherlands 61.9 Chile Mitsui Bussan Copper Investment & Investment in Caserones copper mine in Mineral & Japan 100.0
Metal Co., Ltd. Chile MITSUI BUSSAN METALS CO., Sales and trading of non-ferrous scrap, alloy Resources Japan 100.0 LTD. and products Mitsui & Co. Mineral Resources Investments in nickel and cobalt smelting Philippines 100.0 Development (Asia) Corp. business in Philippines Mitsui Coal Holdings Pty. Ltd. Investments in Australian coal business Australia 100.0 Mitsui & Co. Mozambique Coal Investment in Mozambique coal business Netherlands 100.0 Investment B.V. Mitsui & Co. Mozambique Coal United Arab Finance in Mozambique coal business 100.0 Finance Limited Emirates Mitsui & Co. Nacala Infrastructure Investment in Mozambique rail and port Netherlands 100.0 Investment B.V. infrastructure business Mitsui & Co. Nacala Infrastructure Finance in Mozambique rail and port United Arab 100.0 Finance Limited infrastructure business Emirates
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Jurisdiction Ownership Operating Registered Name Principal Lines of Business of of Voting Segment Incorporation Shares (%) Sales of various plants, electric power Mitsui & Co. Plant Systems, Ltd. Japan 100.0 facilities and transportation equipments KARUGAMO ENERGY Investments in power generation business Australia 100.0 MANAGEMENT PTY. LIMITED Investment in Greenfield Power Generation MIT POWER CANADA LP INC. Canada 100.0 Project in Ontario MITSUI GAS E ENERGIA DO Investments in gas distribution companies in Brazil 100.0 BRASIL LTDA. Brazil Mit Investment Manzanillo B.V. Investment in LNG terminal in Mexico Netherlands 100.0 Investment in deepwater drilling service Drillship Investment B.V. Netherlands 100.0 business Investments in gas distribution companies in MIT Gas Mexico, S. de R.L. de C.V. Mexico 100.0 Mexico Ecogen Brasil Solucoes Energeticas Cogeneration service business in Brazil Brazil 100.0 S.A. Mit-Power Capitals (Thailand) Investment in cogeneration service business Thailand 100.0 Limited in Thailand Designing, building and operation of ATLATEC, S.A. de C.V. Mexico 95.7 wastewater treatment plants Investment and management of power MyPower Corp. U.S.A. 100.0 projects in U.S. MIZHA ENERGIA Investment in power producing business in Brazil 100.0 PARTICIPACOES S.A. Brazil Development and operation of container Portek International Private Limited Singapore 100.0 Machinery & terminal Infrastructure Tokyo International Air Cargo Operation of air cargo terminal at Tokyo Japan 100.0 Terminal Ltd. International Airport Mitsui Water Holdings (Thailand) Investment in water supply business Thailand 100.0 Ltd. Import and sales of automobiles and auto Toyota Chile S.A. Chile 100.0 parts in Chile Mitsui Automotriz S.A. Retail sales of automobiles and auto parts Peru 100.0 MITSUI AUTO FINANCE CHILE Automobile retail finance Chile 100.0 LTDA. Veloce Logistica SA Auto parts logistics Brazil 100.0 MBK USA Commercial Vehicles Investment in full-service truck leasing, U.S.A. 100.0 Inc. rental and logistics business HINO MOTORS SALES MEXICO, Sales of automobile and auto parts Mexico 65.0 S.A. DE C.V. PT. Bussan Auto Finance Motorcycle retail finance Indonesia 70.0
Bussan Auto Finance India Pvt.Ltd. Motorcycle retail finance India 80.0 Komatsu-Mitsui Maquinarias Peru Sales of construction and mining equipment Peru 60.0 S.A. Road Machinery, LLC Sales of construction and mining equipment U.S.A. 100.0
Ellison Technologies Inc. Sales of machine tools U.S.A. 100.0 MITSUI & CO. MACHINE TECH Sale of machine tools and peripheral Japan 100.0 LTD. equipment
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Jurisdiction Ownership Operating Registered Name Principal Lines of Business of of Voting Segment Incorporation Shares (%) Guarana Urban Mobility Investment in passenger transportation Japan 50.1 Incorporated business in Brazil ORIENT MARINE CO., LTD. Shipping business Japan 100.0
OMC SHIPPING PTE. LTD. Shipping business Singapore 100.0 Machinery & Import and sales of helicopters and defense Infrastructure Mitsui Bussan Aerospace Co., Ltd. Japan 100.0 and aerospace products Freightcar leasing and management in North Mitsui Rail Capital Holdings, Inc. U.S.A. 100.0 America Locomotive leasing and management in Mitsui Rail Capital Europe B.V. Netherlands 100.0 Europe Japan-Arabia Methanol Company Investments in methanol producing business Japan 55.0 Ltd. in Saudi Arabia and sales of products Investment in methanol producing business MMTX Inc. U.S.A. 100.0 in the United States and sale of products Shark Bay Salt Pty. Ltd. Production of salt Australia 100.0 Domestic and foreign trade of solvents, Mitsui Bussan Chemicals Co., Ltd. Japan 100.0 coating chemicals, etc. MITSUI & CO. PLASTICS LTD. Sales of plastics and chemicals Japan 100.0 Manufacture and sales of industrial Daito Chemical Co., Ltd. Japan 70.0 chemicals Investment in synthetic rubbers producing Diana Elastomers, Inc. U.S.A 100.0 and marketing business DAIICHI TANKER CO., LTD. Operation of chemical tankers Japan 100.0 Mitsui AgriScience International Investments in crop protection businesses in Chemicals Belgium 100.0 SA/NV Europe Investments in crop protection businesses in Mitsui AgriScience International Inc. U.S.A. 100.0 Americas Manufacture and sales of saccharified San-ei Sucrochemical Co., Ltd. products, pharmaceuticals, feedstuffs and Japan 70.0 other products Mitsui Bussan Agro Business Co., Development and sales of fertilizers and Japan 100.0 Ltd. agricultural products Investment in fertilizer producing business Mitsui Agro Business S.A. Chile 100.0 in South America and sale of products MITSUI PLASTICS INC. Sales of Chemicals U.S.A. 100.0
Novus International, Inc. Manufacturing and sales of feed additives U.S.A. 80.0 Intercontinental Terminals Company Chemical tank leasing U.S.A. 100.0 LLC
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Jurisdiction Ownership Operating Registered Name Principal Lines of Business of of Voting Segment Incorporation Shares (%) Exploration, development and production of Mitsui Oil Exploration Co., Ltd. Japan 74.3 oil and natural gas Exploration, development and production of Mitsui E&P Middle East B.V. Netherlands 100.0 oil and natural gas Exploration, development and production of Mitsui E&P Australia Pty Limited Australia 100.0 oil and natural gas Exploration, development and production of United Mitsui E&P UK Limited 100.0 oil and natural gas in Europe & Africa Kingdom Exploration, development and production of Mitsui E&P USA LLC U.S.A. 100.0 oil and gas MEP Texas Holdings LLC Investment in Oil and Gas in Americas U.S.A. 100.0 Energy Exploration, development and production of Mitsui E&P Italia A S.r.l. Italy 100.0 oil and natural gas based in Italy Mitsui & Co. LNG Investment USA Investment in natural gas liquefaction U.S.A. 100.0 LLC business in the U.S.A. and sales of LNG Mitsui & Co. Energy Trading International trading of petroleum products Singapore 100.0 Singapore Pte. Ltd. and crude oil Investments in Sakhalin Energy Investment Mitsui Sakhalin Holdings B.V. Netherlands 100.0 Company Ltd. Mitsui E&P Mozambique Area 1 Exploration, development and production of United 50.0 Limited oil and natural gas in Mozambique Kingdom Exploration, development and production of Mitsui Gas Development Qatar B.V. Netherland 100.0 oil and natural gas PRIFOODS CO., LTD Production, processing and sales of broilers Japan 46.4 Import and sales of agricultural and marine TOHO BUSSAN KAISHA, LTD. Japan 100.0 products Paul Stuart, Inc. Luxury clothing retailer U.S.A. 100.0 MITSUI & CO. REAL ESTATE Real estate sales, leasing and brokerage Japan 100.0 LTD. United Grain Corporation of Oregon Grain merchandising U.S.A. 100.0 Production and merchandising of XINGU AGRI AG Switzerland 100.0 agriproducts Origination and merchandising of Multigrain Trading AG Switzerland 100.0 agricultural products Lifestyle Mitsui Norin Co., Ltd. Manufacture and sales of food products Japan 100.0 Export of coffee beans and domestic sales of MITSUI ALIMENTOS LTDA. Brazil 100.0 roasted coffee Investment in salmon farming, processing Mit-Salmon Chile SpA Chile 100.0 and sales company Trading canned foods,chilled foods, juice Mitsui Foods, Inc. U.S.A. 100.0 ingredient and coffee MITSUI FOODS CO., LTD. Wholesale of foods and beverages Japan 100.0 Operation and management of logistics Bussan Logistics Solutions Co., Ltd. Japan 100.0 centers MITSUI BUSSAN I-FASHION Planning and management for production Japan 100.0 LTD. and procurement of apparel
10
Jurisdiction Ownership Operating Registered Name Principal Lines of Business of of Voting Segment Incorporation Shares (%) Sales and distribution of food and packaging VENDOR SERVICE CO., LTD. Japan 100.0 materials MBK Real Estate LLC Real estate-related business U.S.A. 100.0 RETAIL SYSTEM SERVICE CO., Sales of foods and groceries, services for Japan 100.0 LTD retailers WILSEY FOODS, INC. Investments in processed oil food company U.S.A. 90.0
Lifestyle Mitsui & Co. Foresight Ltd. Property management Japan 100.0
UHS Partners, Inc. Investment in healthcare staffing business U.S.A. 100.0 Manufacture and sales of medicines and MicroBiopharm Japan Co., Ltd. Japan 80.0 chemicals MAX MARA JAPAN CO., LTD. Import and sales of luxury clothing Japan 65.5 Mitsui Bussan Woodchip Oceania Plantation, processing and sales of woodchip Australia 100.0 Pty. Ltd. MITSUI KNOWLEDGE Planning, development and sales of Japan 100.0 INDUSTRY CO., LTD. information and communication systems Sales and development of IoT solutions, Mitsui Bussan Electronics Ltd. Japan 100.0 Sales of electronics device and equipment Mitsui Bussan Secure Directions, Cyber security business Japan 100.0 Inc. Investment in high-speed mobile service Asia Pacific Mobile Pte. Ltd. Singapore 100.0 business in Indonesia Mitsuibussan Insurance Co., Ltd. Non life and life insurance agency services Japan 100.0
Mitsui & Co. Global Investment Ltd. Investment in venture businesses Japan 100.0 Innovation & Mitsui & Co., Principal Investments Corporate Investment in private equity Japan 100.0 Ltd. Development Mitsui & Co. Asset Management Real estate asset management Japan 100.0 Holdings LTD. United Mitsui Bussan Commodities Ltd Trading of energy and basemetal derivatives 100.0 Kingdom Domestic warehousing businesses and Mitsui & Co. Global Logistics, Ltd. international integrated transportation Japan 100.0 services Mitsui & Co. Alternative Securities and investment management firm Japan 100.0 Investments Ltd. specializing in the alternative investments Vehicle for the investment in a real asset SABRE INVESTMENTS, LLC U.S.A. 100.0 owner and operator in US.
11
Jurisdiction Ownership Operating Registered Name Principal Lines of Business of of Voting Segment Incorporation Shares (%)
Mitsui & Co. (U.S.A.), Inc. Trading U.S.A. 100.0
Mitsui & Co. (Canada) Ltd. Trading Canada 100.0
MITSUI & CO. (BRASIL) S.A. Trading Brazil 100.0 United Mitsui & Co. Europe PLC Trading 100.0 Kingdom Mitsui & Co. Deutschland GmbH Trading Germany 100.0
Mitsui & Co. Benelux S.A./N.V. Trading Belgium 100.0
Mitsui & Co. Italia S.p.A. Trading Italy 100.0 United Arab Mitsui & Co., Middle East Limited Trading 100.0 Emirates Mitsui & Co. (Asia Pacific) Pte. Ltd. Trading Singapore 100.0
Mitsui & Co. (Thailand) Ltd. Trading Thailand 100.0
Mitsiam International Ltd. Trading Thailand 75.1
Mitsui & Co. (Australia) Ltd. Trading Australia 100.0
Mitsui & Co. (Hong Kong) Ltd. Trading China 100.0
All Other Mitsui & Co. (China) Ltd. Trading China 100.0
Mitsui & Co. (Shanghai) Ltd. Trading China 100.0
Mitsui & Co. (Taiwan) Ltd. Trading Taiwan 100.0
Mitsui & Co. Korea Ltd. Trading Korea 100.0
Mitsui & Co. Financial Services Ltd. Financing services within the Group Japan 100.0 Mitsui & Co. Financial Services Financing services within the Group Singapore 100.0 (Asia) Ltd. Mitsui & Co. Financial Services Financing services within the Group U.S.A. 100.0 (U.S.A.) Inc. Mitsui & Co. Financial Services United Financing services within the Group 100.0 (Europe) Plc Kingdom Mitsui & Co. Financial Services Financing services within the Group Australia 100.0 (Australia) Ltd. MITSUI BUSSAN BUSINESS Provision of HR & GA services to Mitsui Japan 100.0 PARTNERS CO., LTD. and its subsidiaries Provision of logistics-related services to Mitsui & Co. Trade Services Ltd. Japan 100.0 Mitsui and its subsidiaries Mitsui & Co. Financial Management, Provision of accounting and treasury-related Japan 100.0 Ltd. services to Mitsui * Mitsui & Co. Mineral Resources Development (Latin America) Ltd., Mitsui Bussan Copper Investment & Co., Ltd., Tokyo International Air Cargo Terminal Ltd. and Multigrain Trading AG were in a financial condition with liabilities in excess of assets. The amount of negative net worth as of March 31, 2018 were ¥123,290 million, ¥31,371 million, ¥19,547 million, and ¥18,491 million, respectively.
12 (3) Major Equity Accounted Investees
Jurisdiction Ownership Operating Registered Name Principal Lines of Business of of Voting Segment Incorporation Shares (%) *Shanghai Bao-Mit Steel Processing and sales of steel products China 35.0 Distribution Co., Ltd. SIAM YAMATO STEEL Manufacture and sales of steel products Thailand 20.0 COMPANY LIMITED *Gestamp North America, Inc. Manufacture of automotive components U.S.A. 30.0
*Gestamp Holding Mexico, S.L. Manufacture of automotive components Spain 30.0 *Gestamp Brasil Industria De Iron & Steel Manufacture of automotive components Brazil 30.0
Products Autopecas S.A. *Gestamp Holding Argentina, S.L. Manufacture of automotive components Spain 30.0 Investment in manufacture of automotive GESTAMP 2020, S.L. Spain 25.0 components Manufacture of wind turbine towers and *GRI Renewable Industries, S.L. Spain 25.0 flanges Fabrication, upgrading, inspection and United GEG (Holdings) Limited 25.0 maintenance of welded structures Kingdom *Inner Mongolia Erdos Electrical Coal mining, power generation, ferrous alloy Power & Metallurgical Group China 25.0 and chemical production and water pumping Mineral & Limited By Shares Metal NIPPON AMAZON ALUMINIUM Investments in aluminum smelting business Japan 20.9 Resources CO., LTD. in Brazil BHP Billiton Mitsui Coal Pty Ltd Mining and sales of Australian coal Australia 16.8
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Jurisdiction Ownership Operating Registered Name Principal Lines of Business of of Voting Segment Incorporation Shares (%) Engineering and construction for industrial Toyo Engineering Corporation Japan 22.9 facilities P.T. PAITON ENERGY Power generation in Indonesia Indonesia 45.5 *Compania de Generacion Power generation in Mexico Mexico 50.0 Valladolid, S. de R.L. de C.V. United *IPM Eagle LLP Investments in power generation business 30.0 Kingdom United *IPM Holdings (UK) Limited Power plant business in the United Kingdom 26.3 Kingdom MT Falcon Holdings Company, Investment in power generation business in Mexico 40.0 S.A.P.I. de C.V. Mexico *3B POWER SDN. BHD. Power generation in Malaysia Malaysia 50.0
*SAFI ENERGY COMPANY Power generation in Morocco Morocco 30.0 *MAP Power Holding Company Investment in power generation business in United Arab 50.0 Limited Oman Emirates *MAP Inland Holding Company Investment in power generation business in United Arab 52.7 Machinery & Limited Oman Emirates Infrastructure *MAP Coastal Holding Company Investment in power generation business in United Arab 52.7 Limited Oman Emirates VLI S.A. Integrated freight transportation business Brazil 20.0
Penske Automotive Group, Inc. Automotive retailer U.S.A. 15.7 *HINO MOTORS SALES Sales of automobile and auto parts Thailand 43.0 (THAILAND) LTD. *TOYOTA MANILA BAY Retail sales of Toyota cars Philippines 40.0 CORPORATION *PT. Yamaha Indonesia Motor Manufacture and sales of motorcycles Indonesia 15.0 Manufacturing Manufacture and sales of two-wheeled India Yamaha Motor Pvt. Ltd. India 15.0 vehicles BAF (Thailand) Co., Ltd. Motorcycle retail finance Thailand 25.0
TAIYOKENKI RENTAL CO., LTD Rental of construction machinery Japan 25.9 KOMATSU MARKETING Sales of construction and mining equipment Australia 40.0 SUPPORT AUSTRALIA PTY LTD *ITC RUBIS TERMINAL Chemical tank leasing Belgium 50.0 ANTWERP NV Manufacturer of fiber reinforced pressure HEXAGON COMPOSITES ASA Norway 25.0 cylinders Manufacture and sales of Linear Alkyl Chemicals LABIX Company Limited Thailand 25.0 Benzene Investment to PT Champion Pacific *PT Kingsford Holdings Indonesia 40.0 Indonesia Investment in a phosphate rock mining MVM Resources International B.V. Netherlands 25.0 project in Peru LPG imports and marketing, fuel cell and *ENEOS GLOBE Corporation Japan 30.0 photovoltaic systems marketing Energy *Japan Australia LNG (MIMI) Pty. Exploration, development and sales of crude Australia 50.0 Ltd. oil and natural gas
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Jurisdiction Ownership Operating Registered Name Principal Lines of Business of of Voting Segment Incorporation Shares (%) Manufacturing and sales of compound FEED ONE CO., LTD. Japan 25.0 feedstuffs Processing and sale of meat, manufacture Starzen Co., Ltd. Japan 16.6 and sale of meat products Mitsui Sugar Co., Ltd. Manufacture of refined sugar Japan 32.3
The Kumphawapi Sugar Co., Ltd. Production and sales of sugar Thailand 44.7
*AIM SERVICES CO., LTD. Contract food services Japan 50.0 *ARAMARK Uniform Services Rental and sales of uniforms Japan 39.2 Japan Corporation Dispensary pharmacy business, total Lifestyle SOGO MEDICAL CO., LTD. solutions for medical institution Japan 25.6 management Panasonic Healthcare Holdings Development, manufacture and sale of Japan 22.0 Corporation various health care equipment and services Investment in MIMS Group, a healthcare United *Medica Asia (Holdco) Limited 40.0 information company Kingdom IHH Healthcare Berhad Provider of healthcare services Malaysia 18.0 Manufacture and sale of pharmaceutical Fuji Pharma Co., Ltd. Japan 22.9 products Sales of building materials, contract of *SMB KENZAI CO., LTD. construction work and import of various Japan 36.3 building materials Comprehensive telemarketing and direct Relia Inc. Japan 34.4 marketing operations Direct Marketing Business which is mainly QVC JAPAN INC. Japan 40.0 Innovation & composed of TV shopping Corporate CCTV Shopping Co., Ltd. Service for TV shopping business in China China 25.0 Development JA Mitsui Leasing, Ltd. Leasing and financing business Japan 31.4 New Ocean Capital Management ILS asset management business Bermuda 15.0 Limited * The companies with an asterisk, accounted for using the equity method, are joint ventures in accordance with IFRS 11 “Joint Arrangements.” For more information, see Note 2, “BASIS OF CONSOLIDATED FINANCIAL STATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, V. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.”
(4) Other Affiliated Companies
Not applicable.
15 5. Employees
(1) Mitsui & Co., Ltd. and Subsidiaries As of March 31, 2018
Operating Segment Number of Employees
Iron & Steel Products 1,873 (113) Mineral & Metal Resources 599 (35) Machinery & Infrastructure 15,613 (4,902) Chemicals 5,107 (347) Energy 803 (58) Lifestyle 11,195 (4,860) Innovation & Corporate Development 3,575 (1,462) All Other 3,539 (207) Total 42,304 (11,984) (Note) The figures in parentheses in the number of employees column indicate the annual average number of temporary employees.
(2) Mitsui & Co., Ltd. As of March 31, 2018
Number of Average Yearly Salary Average Age Average Years of Service Employees (Thousands of Yen)
5,859 42.1 18 years 6 months 14,199
Operating Segment Number of Employees
Iron & Steel Products 349 Mineral & Metal Resources 291 Machinery & Infrastructure 851 Chemicals 676 Energy 403 Lifestyle 936 Innovation & Corporate Development 439 All Other 1,914 Total 5,859 (Notes) 1. The number of employees includes 1,231 seconded employees. However, 378 contract workers (including 143 workers seconded to Mitsui from outside Mitsui) and 178 employees hired in overseas offices are not included. 2. The average yearly salary includes bonuses and overtime pay.
(3) Trade Union No material items to report.
16 2. Operating and Financial Review and Prospects
As used in this “2. Operating and Financial Review and Prospects,” “Mitsui” is used to refer to Mitsui & Co., Ltd. (Mitsui Bussan Kabushiki Kaisha), and “we,” “us,” and “our” are used to indicate Mitsui & Co., Ltd. and its subsidiaries, unless otherwise indicated.
In the Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements, the “Company” is used to refer to Mitsui & Co., Ltd., and the “companies” is used to refer to Mitsui & Co., Ltd. and its subsidiaries, unless otherwise indicated.
All references to “Note” throughout “2. Operating and Financial Review and Prospects” relate to the Notes to Consolidated Financial Statements contained elsewhere in this report.
1. Management Policies, Operating Environment, and Management Issues
This Management Policies, Operating Environment, and Management Issues section contains forward-looking statements about Mitsui and its consolidated subsidiaries. These forward-looking statements involve assumptions, risks, uncertainties and other factors, including, but not limited to, those described in “2. Risk Factors.” Such risks, uncertainties and other factors may cause Mitsui’s actual results to be materially different from any future results expressed or implied by these forward-looking statements.
(1) Progress of the Medium-term Management Plan
The following section details progress made during the fiscal year ended March 31, 2018, the initial fiscal year of the Medium- term Management Plan "Driving Value Creation"(*) released in May 2017. (*) The notion of "Driving Value Creation" involves a diverse pool of talented professionals putting effort into proactive business creation and sustainably creating new value by leveraging Mitsui Group's comprehensive strengths and networks.
1) Four key initiatives regarding the Medium-term Management Plan
(a) Build robust profit base and thoroughly strengthen existing businesses (b) Establish selected new growth areas (c) Cash flow focused management; Strengthen financial base (d) Enhance Governance, Personnel and Innovation functions
2) Progress of the Medium-term Management Plan
Key Initiative (a) : Build robust profit base and thoroughly strengthen existing businesses In addition to Mineral & Metal Resources and Energy segments which boast robust profitability, our non-resources business areas have also marked steady growth, particularly the Iron & Steel Products and Machinery & Infrastructure segments. Accordingly, we have gained a solid foothold toward achieving the targets of our Medium-term Management Plan for the fiscal year ending March 31, 2020, having made progress with respect to enhancing profit bases in respective segments with a focus on our specific achievements made as described below. We have gotten off to a notably good start toward attaining our ¥200.0 billion profit target in our non-resources business areas for the fiscal year ending March 31, 2020, having already heightened profit in the non-resources business areas to the ¥170.0 billion level, excluding valuation gains and losses.
17
Key Initiative (b) : Establish selected new growth areas During the fiscal year ended March 31, 2018, solid progress was achieved particularly in Mobility and Healthcare, which are two of our four growth areas. In Mobility, various initiatives are well underway with respect to electrification of commercial vehicles starting in Europe. We are also expanding our railway-related business encompassing passenger railways in starting in the UK, and have otherwise been forging ahead with initiatives in areas such as our operating lease and rental car business in Chile. In Healthcare, we have been expanding our hospital infrastructure business in Southeast Asia which has been making progress thus far, and otherwise steadily building and upgrading the Company's healthcare ecosystem which has partially involved tapping demand for new drugs in Russia through investment in a Russian pharmaceutical company, and furthermore channeling investment to healthcare staffing business in the U.S. Meanwhile in Nutrition & Agriculture, we have expanded our network through an agreement to invest in the ETC Group Limited which engages in business involving agricultural products, agricultural supplies, and food manufacturing and sales in East Africa, and have also been strengthening operations in the field of food sciences, which in part has consisted of a tender offer involving Soda Aromatic Co., Ltd. In Retail & Services, we expanded assets under management to ¥1.9 trillion over the last year by addressing diverse needs of investors through our asset management business in Japan and overseas. In the fashion and retail business, we have been enhancing our marketing capabilities and strengths by acquiring Bigi Holdings Co., Ltd. and extending our points of consumer contact through use of its marketing and sales platforms.
Key Initiative (c) : Cash flow focused management; Strengthen financial base For further information regarding the progress of Cash Flow Allocation in the Medium-Term Management Plan, see "3. Management's Discussion and Analysis of Financial Position, Operating Results and Cash Flows, (5) Liquidity and Capital Resources, 4) Investments and Loans, Financial Policies."
Key Initiative (d) : Enhance Governance, Personnel and Innovation functions Our efforts to strengthen governance have involved diversifying membership of the Board of Directors to achieve greater balance, and enhancing effectiveness of the Board of Directors in part by creating more opportunities for discussion regarding the Company’s overall direction and strategies. We have also been promoting an approach to management with greater emphasis on sustainability of society and the Company, which has involved newly establishing the Sustainability Committee upon expanding the role of the former CSR Promotion Committee. With respect to strengthening the individual personnel, we have been enhancing the earning power of the overall Company by boldly shifting our corporate staff to our front line operations, and have consequently sent more than 70 employees to such operations. Moreover, we have also adopted staggered working hour arrangements at the individual level and have otherwise been implementing measures geared to heightening employee productivity. In order to boost employee willingness to take on challenges we have also launched an in-house entrepreneur scheme, and are currently paving the way to commercialize two ideas selected from that program.
18 To strengthen our innovation functions, we created the position of Chief Digital Officer (CDO) in May 2017. Under the strong leadership of the CDO, we have been pursuing digital transformation initiatives on a Company-wide basis, and are currently taking action with respect to 50 to 60 projects, some pending review, grouped into the three categories of “existing business cost reduction,” “existing business sales growth,” and “new business development.”
(2) Operating Environment
1) General
Note: The following describes the understanding of the economic environments as of May 2018. Descriptions included herein may differ from our current understanding.
In the year ended March 31, 2018, the global economy saw ongoing gradual growth in both developed countries and emerging countries supported by firm spending and investment. In the U.S., consumer spending continues to be resilient supported by a favorable environment for employment and employee income. At the same time, tax reform is expected to drive capital investment. As such, economic recovery is expected to continue for the time being. In Europe, though the economy has been resilient following growth in spending and investment, this growth is expected to weaken going forward as corporate business confidence plateaus. In Japan, gradual economic recovery is expected to continue as a result of consumer spending continuing to be resilient following improvement in the employment environment, and because of increases in both investment related to the Olympic and Paralympic Games, and in capital investment focused on labor-saving initiatives. In emerging countries, while stable growth continues in China, this growth is expected to weaken following an environment of excess capacity and adjustments of debts. At the same time, future growth is expected in India due to the progress of economic reform such as the introduction of the Goods and Services Tax. Also, the trend of gradual recovery is expected to continue in Brazil with consumption and investment picking up. However, limited growth is expected to continue in Russia due in part to ongoing sanctions from the U.S. and other nations. The global economy is expected to follow a trend of gentle recovery going forward. However, careful watch continues to be needed on the escalation of geopolitical risk surrounding the Middle East, the future prospects for the European and U.S. economies, which have shown signs of maturity in some parts, the impact of the Federal Reserve Board’s monetary tightening on the economies of emerging countries, and trends in U.S. trade policy.
2) Iron & Steel Products
Global steel output for the 2017 increased by 5.3% year-on-year to approximately 1.7 billion tons, reflecting steel demand not only in emerging markets such as China and India but also in the North America and the EU. On the other hand, due to continued excessive steel supply mainly from Chinese steel manufacturers, which account for almost half of the global steel output, the difficult business environment is expected to persist. Under this situation, amid the integration in the steel industry even more intensified reorganization could occur among steel distributors. Over the medium to long term, the domestic iron and steel market is expected to shrink gradually due to population decline, among other factors. However, we anticipate that the Americas and Asia will drive a global economic recovery, resulting in increased demand overseas for iron and steel products. Many business opportunities are expected to arise from this development.
3) Mineral & Metal Resources
In the short term, there is a risk that economic growth in China and emerging countries could slow down, which may lead to a weaker commodity market, however, steel and non-ferrous metals are core industrial materials, and demand for these materials is likely to grow over the long term. On the other hand, over the medium to long term, supply and demand is expected to be tightened due to supply limitations resulting from the limited availability of high-quality undeveloped projects, in addition to rising development and production costs, depletion of reserves, and deterioration of quality minerals from existing mines. The segment believes the mineral and metal resources business will continue to be an important aspect of its operations.
4) Machinery & Infrastructure
In emerging countries, where economics and populations continue growing markedly, demand is rising for the development of basic infrastructure, including electrical, water-related and logistical infrastructure. As for industrialized countries, aging infrastructure is leading to increased demand for repairs. The efforts to create a low-carbon society are also boosting demand for 19 related infrastructure investment, such as a rapid expansion of environmentally friendly renewable energy. Moreover, as facilities and equipment for energy resource development become more advanced, larger, and more complex, development demand is rising overall. In the United States, the progress of shale oil and gas development is heightening demand, not only for infrastructure development but also for pipeline transportation, downstream chemical manufacturing, gas-fired power generation and LNG shipping facilities. On the other hand, policy interest rates have reached a historical low level backed by the implementation of quantitative easing policies by central banks primarily in industrialized countries, and greater attention is being paid to infrastructure projects from which stable earnings are expected, following an increase in the amount of investment- ready cash. The segment believes the infrastructure business will continue to be an important aspect of its operations.
As demand for resource and energy is seen to rise over the medium to long term with growth in emerging countries, demand for mining machinery should recover and market conditions are expected to pick up due to an increase in land-and-sea- based logistics. In the United States, the manufacturing industry is undergoing a revival, and the underlying trend of improvement in U.S. business conditions is having a favorable effect on the Company’s automobile, truck, machine tool, and construction machinery businesses. Economic expansion in emerging economies has fostered growing concern about associated environmental problems, and a shift to the public transportation has been encouraged as a solution to the traffic congestion. As a result, demand for passenger and freight railway facilities is expected to increase. Due to ongoing global economic growth, the number of airline passengers is expected to increase over the medium to long term, and consequently, demand for airframes and engines is also expected to rise. Meanwhile, as global warming, population growth, urbanization, and the aging of society has progressed, various technological innovations for materials, engines, self-driving cars using artificial intelligence, and so on, have been developed and are soon to be put into practical use. In response to this, user awareness has changed including a heightening of safety and environmental consciousness, and a progressive shift from ownership of transport to use of transport. Against this backdrop, diverse and innovative business models that go beyond industry customs are appearing across industries and many business opportunities are expected to arise from this trend.
5) Chemicals
Due to the shale revolution, the petrochemical industry in North America has regained its competitiveness, and North America is becoming a supply region comparable with the Middle East which has led to changes in the trade flow of petrochemicals. Also due to restriction of capital and environment in China and geographical risk in Middle East, more volatility in the petrochemicals market could occur. In the areas of performance and advance materials as well as specialty chemicals, growth areas are garnering in a global macro environment consisting of a higher awareness toward the environment, improved quality of life, and advances in technological innovations. These growth areas are automobiles, where efforts to make vehicles lighter and electric powered such as electric vehicles and fuel cell vehicles, are progressing; consumer products, such as foods, detergents, and personal care products; and the ICT and new industries, which include electronic materials, in addition to robotics and healthcare. In the agricultural chemicals and food and nutrition science areas, the need for increased food production and the demand for high-value-added food are increasing significantly with population and economic growth in global and the increase in middle income earners and an improved awareness towards health, which has led to market expansion.
6) Energy
Energy demand is expected to increase along with population and economic growth around the world, and oil, natural gas, coal, and nuclear fuel are expected to continue as main sources of primary energy over the medium to long term. However, due to the introduction of new policies to tackle climate change, there are analysis and scenarios that show a plateau in the energy demand for fossil fuel from around 2030 to 2040, and it is important for us to build a strong portfolio of cost competitive assets that can thrive under that environment. As oil demand is expected to increase in the medium to long term, the crude oil market is expected to follow a gentle uptrend mainly due to the effect of slowed-down development by restrained new upstream investment and the necessity to develop higher cost fields. On the other hand, we are aware of the rapid growth in sales of EVs and compounded with the effect of environmental regulations, the potential decrease in the demand for oil needs to be carefully monitored. The LNG market is expected to remain as an oversupply situation for the time being, because the pace of LNG demand increase will not match with the supply increase by start-up of new large-scale LNG projects in Australia, the U.S., and so on. However, in the medium and long term, the oversupply situation is expected to be resolved around the early 2020s due to the firm demand increase mainly resulting from market expansion in emerging countries and an environmental consideration.
20 In the upstream business, including E&P and LNG projects, we are working to improve profitability by promoting proactive initiatives and taking advantage of lower development costs caused by lower commodity prices. We are also promoting the development of undeveloped reserves and acquisition of good quality assets, which will establish a more stable earnings base. In addition, we will enhance our presence by reinforcing global business and trading structure, and we will develop business through our energy value chain from upstream to midstream to downstream, further enhancing our earnings base and improving the sustainable value-creating capabilities of our business portfolio by capturing new demand arising in emerging countries and opportunities in infrastructure business such as power generation plants and terminals. As a response to climate change, there has been a need for a shift to cleaner energy and action taken toward contributing to a low- carbon society. The growth rate of renewable energies, centered primarily on solar power and wind power, is high due to cost reduction by rapid technological innovation. Depending on the growth rate, it could significantly affect the composition of primary energy sources. By assessing the trends in energy business from a long-term perspective, we intend to promote the establishment of a well- balanced energy portfolio for the future, and to contribute to the sustainable growth of society through comprehensive stable energy supply.
7) Lifestyle
As the global population and economy grow, food demand is expected to increase constantly. Meanwhile, against a background of decreasing agricultural population primarily in industrialized countries and changes to suitable agricultural land due to climate change, the uneven distribution of food-producing regions is progressing and the need to secure food resources and stable food supplies is expected to become more pressing. The global increase of the middle-income class leads to the sophistication of food demand, such as preferences for taste, animal protein, and so on. Additionally, the aging of society led food demand to diversify in areas such as health improvement, disease prevention, safety, security, and so on. The segment believes that it is also necessary to address the demand for high-value-added food. In Japan’s mature consumer market, consumption is expected to decline at a moderate pace due to a declining birthrate and a population that is contracting and aging. The changes are not only quantitative. Against a backdrop of changing lifestyles accompanying the increase in the senior population, and increases in dual-income households and small families due to more women having jobs, there are substantial changes in the quality and contents of services required, such as an emphasis on medical and healthcare services and the pursuit of safety, security and convenience. In emerging countries, mainly in Asia, the growth of medical expenditures is accelerating alongside changes in disease patterns, such as an increase in chronic disease patients, accompanying population growth, an aging society, an increasing middle-income class, and economic development. On the other hand, due to a shortage in the supply of medical services, demand-supply gaps regarding medical services are expected to expand further. The segment believes that it is necessary to address the difficult issues of increasing the supply of high-quality medical services and curtailing medical expenditures.
8) Innovation & Corporate Development
In the ICT business area, with the evolution of AI, robotics and IoT, the value of digital data is increasing drastically and it has given more power of influence to consumers. Business environments are changing rapidly, and as a result, there is a need to take swift action as technological innovation, as well as new services and business models, leads the way toward a next-generation society in which advanced ICT technologies and the real economy are closely linked. In the Corporate Development business area, real estate asset management business, combining the knowledge of the real estate and finance businesses, is expanding in both developed and emerging economies around the world, however, more attention on the decrease of monetary easing initiatives and the increase of policy interest rates should be paid. Furthermore, buyout funds and other private equity funds, which provide management know-how and funding, are playing an increasingly important role in supporting corporate growth.
(3) Business Plan for the Year Ending March 31, 2019
The current fiscal year stands as a crucial one in terms of achieving our targets for the fiscal year ending March 31, 2020, the final fiscal year of the Medium-term Management Plan. As such, we will steadily expand our base profitability by continually pursuing the key initiatives set forth in our Medium-term Management Plan, following on from the previous fiscal year.
21
1) Action Plan for the Year Ending March 31, 2019
Of the plan's three core areas (Resources & Energy, Machinery & Infrastructure, and Chemicals), in Resources & Energy we will persist with efforts to reinforce our three key strengths of reserves, production and cost competitiveness. In Mineral & Metal Resources, we will continue to promote expansion of our profit base of existing operations in Australia, and also will work to improve operations at the Caserones copper mine in Chile. In Energy, we will engage in initiatives geared to making a final investment decision concerning the LNG project in Mozambique, and will also successfully initiate production in oil fields of both Kaikias of the U.S. and Tempa Rossa of Italy, slated for the current fiscal year. We will also steadily promote integration into the Mitsui Group of Australian-based AWE amid the decision to make it a subsidiary by means of takeover offer, and will accordingly enhance the upstream and midstream oil and gas business, while equipping ourselves with operator functions. In Machinery & Infrastructure, we will launch new power generation projects now under construction, and will also accelerate initiatives in the field of next-generation power, particularly involving the distributed power and services business of U.S. solar power business operator Forefront Power LLC, acquired during the fiscal year ended March 31, 2017. In areas such as railways, automotive and aircraft, we will take a multifaceted approach to intensifying initiatives involving mobility services with respect to leasing, rental and sharing businesses. In Chemicals, we will expand facilities of U.S. tank terminal business operator ITC, and will also develop the coating materials business centered on Kansai Helios Coating GmbH, a joint venture with Kansai Paint Co., Ltd. Furthermore, we will promote the growth strategy with respect to U.S. feed additive manufacturing and sales company Novus International, Inc., particularly in terms of expanding its methionine production capacity. We will also continue efforts from the previous fiscal year that involve reducing the number of loss-making companies, while steadfastly working to enhance quality and productiveness of existing businesses. We will also place focus on further accelerating initiatives in our four growth areas (Mobility, Healthcare, Nutrition & Agriculture, and Retail & Services) and developing our next revenue pillars to follow the current core areas of business.
2) Business Assets: Contribution to Profit and Cash Generation
In the fiscal year ending March 31, 2019, new projects are poised to begin contributing to profits and generating cash, particularly in the Iron & Steel Products and Lifestyle segments, in addition to our business assets in the core areas of Resources & Energy, Machinery & Infrastructure, and Chemicals. We aim to achieve the quantitative targets of our Medium-term Management Plan, and will accordingly enhance profit bases by doing everything possible to ensure steady start-up of projects.
22 3) Cash Flow Allocation Results and Latest Forecast (over the three-year period of the Medium-term Management Plan on a cumulative basis)
We have updated the cumulative total of cash flow allocations for the three years of the Medium-term Management Plan released in May 2017, upon taking into account financial results for the fiscal year ended March 31, 2018, and targets for the fiscal year ending March 31, 2019. While the update reflects the increase in core operating cash flow and additional shareholder returns, we will maintain total investment and loans at ¥1.7 to ¥1.9 trillion, and asset recycling at ¥700.0 billion over the three-year period on a cumulative basis by sustaining strict investment discipline. For the sake of convenience, the cumulative three-year total of shareholder returns has been calculated expediently assuming minimum dividend allocation of ¥100.0 billion, as released in 2017, with respect to the fiscal year ending March 31, 2020. As a result, we forecast an increase of up to ¥270.0 billion to ¥470.0 billion in free cash flow after furnishing shareholder returns, on a three-year cumulative basis. That amount will be allocated for additional shareholder returns, repayment of interest-bearing debt, and additional investment, upon having taken into account business circumstances at the given time.
4) Profit Distribution Policy
For further information regarding shareholder return policy, see "4. Corporate Information, 3. Shareholder Return Policy."
23 (4) Forecasts for the Year Ending March 31, 2019
1) Forecasts for the Year Ending March 31, 2019
[Assumption] Exchange rate (JPY/USD) 110.00 110.70 Crude oil (JCC) $59/bbl $57/bbl Consolidated oil price $61/bbl $54/bbl
March 31, March 31, (Billions of yen) 2019 2018 Change Description Forecast Result Gross profit 830.0 790.7 39.3 Higher crude oil price Selling, general and administrative Reversal effect of provision for (560.0) (571.7) 11.7 expenses Caserones Reversal effects of Valepar Gain (loss) on investments, fixed 0.0 35.7 (35.7) reorganization and provision for assets and other Multigrain Interest expenses (40.0) (30.0) (10.0) Increase in dividend at the Mineral & Dividend income 100.0 84.8 15.2 Metal Resources Segment Profit (loss) of equity method Reversal effects of loss making 260.0 234.9 25.1 investments businesses Profit before income taxes 590.0 544.4 45.6 Reversal effects of Valepar Income taxes (150.0) (103.1) (46.9) reorganization Non-controlling interests (20.0) (22.8) 2.8 Profit for the year attributable to 420.0 418.5 1.5 owners of the parent
Depreciation and amortization 200.0 192.6 7.4
Core operating cash flow 570.0 666.5 (96.5)
We assume foreign exchange rates for the year ending March 31, 2019 will be ¥110/US$, ¥85/AU$ and ¥33/BRL, while average foreign exchange rates for the year ended March 31, 2018 were ¥110.70/US$, ¥85.77/AU$ and ¥34.25/BRL. Also, we assume the annual average crude oil price applicable to our financial results for the year ending March 31, 2019 will be US$61/barrel, up US$7 from the previous year, based on the assumption that the crude oil price (JCC) will average US$59/barrel throughout the year ending March 31, 2019.
24 The forecast for profit for the year attributable to owners of the parent by operating segment compared to the original forecast is as follows:
Year ending Year ended (Billions of yen) Change Description March 31, 2019 March 31, 2018
Iron & Steel Products 15.0 24.7 (9.7) Reversal effect of gain on derivative Mineral & Metal 175.0 257.6 (82.6) Reversal effect of Valepar reorganization Resources Machinery & 85.0 89.6 (4.6) Infrastructure Chemicals 40.0 34.2 +5.8 Energy 65.0 48.6 +16.4 Reversal effect of US tax reform Lifestyle 25.0 (26.3) +51.3 Reversal effect of provision for Multigrain Innovation & Corporate 15.0 (4.6) +19.6 Reversal effect of valuation losses Development All Other and Adjustments and 0.0 (5.3) +5.3 Eliminations Consolidated Total 420.0 418.5 +1.5
The forecast for core operating cash flow by operating segment compared to the original forecast is as follows:
Year ending Year ended (Billions of yen) Change Description March 31, 2019 March 31, 2018
Iron & Steel Products 10.0 14.2 (4.2) Mineral & Metal Lower iron ore & coal prices, decline in 200.0 240.8 (40.8) Resources dividend from equity accounted investees Machinery & 85.0 158.8 (73.8) Decline in dividend from IPP business Infrastructure Chemicals 55.0 50.2 +4.8 Energy 180.0 175.3 +4.7 Lifestyle 15.0 7.1 +7.9 Innovation & Corporate 15.0 3.1 +11.9 Reversal effect of valuation (FVTPL) Development All Other and Adjustments and 10.0 17.0 (7.0) Eliminations Consolidated Total 570.0 666.5 (96.5)
25 2) Key commodity prices and other parameters for the year ending March 31, 2019
The table below shows assumptions for key commodity prices and foreign exchange rates for the forecast for the year ending March 31, 2019. The effects of movements on each commodity price and foreign exchange rates on profit for the year attributable to owners of the parent are included in the table.
Impact on profit for the year attributable to owners of the parent March 2019 March 2018 for the Year ending March 31, 2019 Assumption Result
Crude Oil/JCC - 59 57 Consolidated Oil Price (*1) ¥2.9bn (US$1/bbl) 61 54 Commodity U.S. Natural Gas (*2) ¥0.5bn (US$0.1/mmBtu) 3.00 (*3) 3.03 (*4) Iron Ore ¥2.3bn (US$1/ton) (*5) 68 (*6) ← Copper (*7) ¥1.0bn (US$100/ton) 7,000 6,163 (*8) USD ¥2.6bn (¥1/USD) 110 110.70 Forex (*9) AUD ¥1.7bn (¥1/AUD) 85 85.77 BRL ¥0.7bn (¥1/BRL) 33 34.25
(*1) The oil price trend is reflected in profit for the year attributable to owners of the parent with a 0-6 month time lag. For the year ending March 31, 2019, we assume the annual average price applicable to our financial results as the Consolidated Oil Price based on the estimation: 4-6 month time lag, 51%; 1-3 month time lag, 40%; no time lag, 9%. The above sensitivities show impact on annual figures resulting from changes in consolidated oil price. (*2) As Mitsui has very limited exposure to U.S. natural gas sold at Henry Hub (HH), the above sensitivities show impact of changes in the weighted average sale price. (*3) For natural gas sold in the US on HH linked prices, the assumed price used is US$3.00/mmBtu. (*4) Daily average of settlement price for prompt month Henry Hub Natural Gas Futures contracts reported by NYMEX during January 2017 to December 2017. (*5) We refrain from disclosing the iron ore price assumptions. (*6) Daily average of representative reference prices (Fine, Fe 62% CFR North China) during April 2017 to March 2018. (*7) As the copper price affects our consolidated results with a 3 month time lag, the above sensitivities show the impact of US$100/ton change in averages of the LME monthly average cash settlement prices for the period March to December 2018. (*8) The LME monthly average cash settlement price during January 2017 to December 2017. (*9) Impact of currency fluctuation on profit (loss) for the year attributable to owners of the parent of overseas subsidiaries and equity accounted investees (denomination in functional currency) against the Japanese yen. Impact of currency fluctuation between their functional currencies against revenue currencies and exchange rate hedging are not included.
Note: Impact of Foreign Currency Exchange Fluctuation on Operating Results
The total sums for profit for the year attributable to owners of the parent for the years ended March 31, 2018 and 2017 reported by overseas subsidiaries and equity accounted investees were ¥312.1 billion and ¥314.3 billion, respectively. These companies principally use the U.S. dollar, the Australian dollar and the Brazilian real as functional currencies in their reporting.
We conducted a simplified estimation for the effect of foreign currency exchange fluctuations on profit for the year attributable to owners of the parent for the year ending March 2019.
(a) We aggregated a total projected profit for the year attributable to owners of the parent in the business plans of these companies covering the year ending March 31, 2019, according to their functional currencies. Firstly, we aggregated Australian dollar- and Brazilian real-denominated projected profit for the year attributable to owners of the parent of those companies using two currencies as functional currencies. Secondly, we aggregated the rest of the projected profit for the year attributable to owners of the parent from overseas subsidiaries and equity accounted investees as a US dollar-equivalent amount. We conducted a sensitivity analysis on foreign currency fluctuation for three categories of aggregated profit for the year attributable to owners of the parent.
26 For example, yen appreciation of ¥1 against US$1 would have the net effect of reducing profit for the year attributable to owners of the parent by approximately ¥2.6 billion. Specifically, for the profit for the year attributable to owners of the parent from those companies using Australian dollar and Brazilian real as functional currencies, appreciation of ¥1 against AUD1 and BRL1 would have the net effect of reducing profit for the year attributable to owners of the parent by approximately ¥1.7 billion and ¥0.7 billion, respectively.
(b) Profit for the year attributable to owners of the parent from those mineral resources and energy producing companies are affected by the currency fluctuation between the US dollar as a contractual currency of sales contracts and the two currencies as functional currency, affecting their Australian dollar or Brazilian real denominated revenues. Attention should be paid to this, in addition to the impact that is discussed in (a) above.
(c) Furthermore, some subsidiaries and equity accounted investees, including the mineral resources- and energy-related production companies, carry out hedging on the exchange rates between their functional currencies and the US dollar, which is the contract currency for sales contracts. There are also cases that they carry out exchange rate hedging for yen equivalence valuation of profit for the year attributable to owners of the parent that is denominated in foreign currencies. It is necessary to take the impact of these factors into consideration separately from the sensitivity resulting from the yen equivalence valuation of profit for the year attributable to owners of the parent in each of the three currencies mentioned in (a) above.
27 2. Risk Factors
(1) Risks of Changes in Global Macroeconomic Factors
Our global business activities are affected by economic conditions both globally and regionally. Among other locations, we are particularly vulnerable to downward economic trends in Europe, Japan, China, the United States and emerging countries. An economic downturn may cause a reduction in the flow of goods and materials, a decline in consumer spending and capital investment, and subsequently a decline in demand from our customers for our products and services, which may have an adverse impact on our business, operating results and financial condition.
(2) Market Risk
1) Commodity Market Risk
We are engaged in trades in and, as the case may be, production of a variety of commodities in the global commodities market including mineral resources and energy products. Among others, operating results from our mineral resources and energy producing activities account for significant portion in our overall operating results. These commodity markets can be volatile in a short period or seasonally fluctuate by various factors such as imbalance of supply and demand, economic fluctuation, inventory adjustment, and exchange rate fluctuations. These factors are beyond our control. The unexpected market fluctuations may adversely affect our business, operating results and financial condition, as follows.
- At businesses such as mineral resources and/or energy development projects, in which large amounts of investment has been made, it may occur that the invested amount is not recoverable through sales of the produced products due to a fall in price or we may have difficulty in divesting our proprietary equity at a reasonable price. - A decline in the value of our investments in LNG projects and other investments which are recognized to designate as at fair value through other comprehensive income (“FVTOCI”), could adversely affect our operating results and financial condition due to the decline of other comprehensive income. - In trading of commodities or derivative instruments losses may occur as a result of unexpected fluctuations. - Fluctuations in a commodity market may cause a reduction of trading transactions in which we act as a principal or an agent.
For further information about the impact of commodity price fluctuations on our operating results for the year ended March 31, 2018 and possible effects in the future, see “1. Management Policies, Operating Environment, and Management Issues, (4) Forecasts for the Year Ending March 31, 2019” and “3. Management’s Discussion and Analysis of Financial Position, Operating Results and Cash Flows, (4) Discussion and Analysis of Operating Results for the Years Ended March 31, 2018 and 2017.”
2) Foreign Currency Risk
We are exposed to risk of exchange rate fluctuations and exchange rate fluctuations may have an adverse effect on our operating results. Although our reporting currency is the Japanese yen, a significant portion of our business operations, consolidated revenues and operating expenses is denominated in currencies other than the Japanese yen. As a result, appreciation or depreciation in the value of other currencies as compared to the Japanese yen could result in material transactional gains or losses. As most of revenues, costs of revenues, and selling, general and administrative expenses incurred from regular business activities at overseas subsidiaries and associated companies are quoted in the U.S. dollar, the Australian dollar, the Brazilian real, or other currencies, our profit for the year may be affected by the fluctuations of these currencies and we are exposed to translation risk in our assets and liabilities denominated in foreign currencies. In addition, exchange rate fluctuations may reduce the value of investments in overseas subsidiaries and associated companies as well as in FVTOCI, and adversely affect our accumulated other comprehensive income.
For further information about the impact of exchange rate fluctuations on our operating results for the year ended March 31, 2018 and in the future, see “1. Management Policies, Operating Environment, and Management Issues, (4) Forecasts for the Year Ending March 31, 2019” and “3. Management’s Discussion and Analysis of Financial Position, Operating Results and Cash Flows, (5) Liquidity and Capital Resources.”
28 3) Interest Rate Risk
We are exposed to risks associated with interest rate fluctuations, which may affect our overall operational costs and the value of our financial assets and liabilities, particularly our debt obligations from the capital markets and borrowings from financial institutions, including ¥201.6 billion short-term debt and ¥4,025.4 billion long-term debt as of March 31, 2018. An increase in interest rates, especially in Japan and the United States, may adversely affect our operating results.
For information on the status of our funding, see “3. Management’s Discussion and Analysis of Financial Position, Operating Results and Cash Flows, (5) Liquidity and Capital Resources” and Note 9, “DISCLOSURES ABOUT FINANCIAL INSTRUMENTS AND RELATED MATTERS.”
4) Stock Price Risk
A significant portion of our investment portfolio consists of marketable equity financial assets. At March 31, 2018, our marketable equity financial assets recognized to designate as FVTOCI were carried at a fair value of ¥1.046.6 billion, representing 9.3% of our total assets. While we periodically review our investment portfolio, a decline in the equity securities market could negatively impact the value of our investment portfolio and operating results and financial condition due to the decline of other comprehensive income.
5) Risks Regarding Pension Cost and Projected Benefit Obligations
Declines in the market value of domestic and foreign government bonds, other debt securities and marketable equity securities would reduce the value of our pension plan assets. A decline in the value of our pension plan assets or an increase in our unfunded defined benefit obligation could adversely affect our operating results and financial condition due to the decline of other comprehensive income and retained earnings.
For information on our defined benefit cost, see “3. Management’s Discussion and Analysis of Financial Position, Operating Results and Cash Flows, (6) Critical Accounting Policies and Estimates” and Note 19, “EMPLOYEE BENEFITS.”
(3) Credit Risks
We are exposed to large-scale counterparty credit risks, including the following:
- While many of our customers purchase products and services from us on credit, we may also provide financing programs or debt guarantees for customers associated with sales contracts. At March 31, 2018, our current trade receivables (less allowance for doubtful receivables－current) were ¥1,766.0 billion, representing 15.6% of our total assets. The balance of the allowance for doubtful receivables－current for the year ended March 31, 2018 was ¥8.6 billion. - We engage in significant project financing activities as a lender or guarantor whereby we assume repayment risk. - We have counterparty payment risk from various derivative transactions we enter into as part of our hedging activities.
It is not possible for our credit risk management policy to eliminate risks completely relating to the deterioration of the financial positions of our counterparties. Furthermore, factors such as insolvencies among our customers caused by liquidity crises, sudden falls in real estate market or stock market prices, or increases in company bankruptcies may make it difficult for us to collect receivables.
(4) Risks Regarding Impairment Loss on Fixed Assets
Assets for our own use and/or rental to third parties, such as equipment and fixtures, land and buildings are exposed to potential significant impairment losses due to the decline in the value of these assets. The total of the carrying amounts of property, plant and equipment, investment property and intangible assets was ¥2,092.1 billion, as of March 31, 2018. The carrying amounts of assets for our own use and/or rental to third parties are affected by certain factors, which are beyond our control such as changes in price, sales volume, production volume and cost based on global or local supply and demand. When impairment losses on these assets occur, impairment losses may have an adverse effect on our operating results and financial condition.
29 For information on our accounting policies and estimates with respect to impairment on non-financial assets, see “3. Management’s Discussion and Analysis of Financial Position, Operating Results and Cash Flows, (6) Critical Accounting Policies and Estimates.”
(5) Risks Regarding Fund Procurement
Turmoil in financial markets, a downgrade in our credit ratings or significant changes in the lending or investment policies of our lenders or institutional investors could result in constraints on our fund procurement and an increase in funding costs, and could have an adverse effect on our financial position and liquidity.
For information on our funding sources and credit ratings, see “3. Management’s Discussion and Analysis of Financial Position, Operating Results and Cash Flows, (5) Liquidity and Capital Resources.”
(6) Risks Regarding Deferred Tax Assets
We determine the recoverability of deferred tax assets based on all currently available information, including tax deductibility of accounting losses, their timing as well as future taxable income at Mitsui and the subsidiaries. Deferred tax assets are recognized except for cases where such deferred tax assets are not recoverable, while the amount of recoverable net deferred tax assets may change if estimates of future taxable income are changed or if tax laws and regulations including statutory tax rates are revised.
A worsening of our operating environment could negatively affect our ability to achieve the goals set in our business plan, and future taxable income may decrease compared to the amount anticipated in the current tax planning strategies. In such cases, decrease in deferred tax assets due to the changes in assessment for recoverability of deferred tax assets may adversely affect our operating results and financial conditions.
(7) Concentrated Risk Exposures
Various types of businesses worldwide sometimes expose us to risks associated with regional political and economic instabilities, in addition to aspects of the global economic environment such as commodity market conditions, demand and supply for commodities, currency exchange rates and interest rates. Furthermore, some of our business activities may be exposed to concentration risk in particular industries located in specific regions or countries. For example:
- In Brazil, Chile and Russia, we have significant interests in the exploration, development and production of mineral resources and energy. - In Indonesia, we actively participate in infrastructure projects, including the operation of power plants, and maintain a nationwide motorcycle retail finance business. - In Mozambique, we have significant interests in the rail and port infrastructure business and the exploration, development and production of mineral resources.
As a result, declining levels of trading activities or asset volumes in specific sectors or in certain regions or countries, or unexpected political or economic instabilities could have a disproportionately negative effect on our business, operating results and financial condition.
(8) Business Investment Risk
As of March 31, 2018, we had 265 consolidated subsidiaries and 207 equity accounted investees. We have been continuously restructuring underperforming businesses of our consolidated subsidiaries and associated companies using a process we have introduced to assess their profitability. If we fail to successfully restructure or eliminate our underperforming subsidiaries and associated companies in a timely manner, or if these efforts fail to improve our business operations as contemplated, our business operations may become less efficient and our operating results and financial condition may be adversely affected.
Furthermore, we participate in various businesses directly or indirectly through joint ventures or by making strategic investments in other companies and business enterprises. The outcome of these joint ventures and strategic investments is unpredictable because:
- operational success is critically dependent on factors that are beyond our control such as the financial condition and performance of the partner companies or the strategic investees; or 30 - with respect to certain associated companies, we may be unable to exercise adequate control over the management, operations and assets of the companies in which we invested or may be unable to make major decisions without the consent of other shareholders or participants due to lack of common business goals and strategic objectives with our alliance partners.
Any occurrence of these events could have an adverse effect on our operating results and financial condition.
(9) Risks Regarding Exploration, Development and Production of Mineral Resources and Oil and Gas
Exploration, development and production activities of mineral resources and oil and gas projects are becoming more significant to our operating results and financial condition. Mining and oil and gas projects involve risks, as follows:
- development of projects may face schedule delays or cost overruns than originally planned, due to difficulties in technical conditions, procurement of materials, financial conditions and government regulations including environmental aspect; - reserves are estimated based on available geological, technical, contractual and economic information, and thus actual development and production may significantly differ from originally estimated reserves; and - exploration activities may not produce successful results and thus it is possible that reserve replacement cannot be achieved as per assumed cost and time schedule.
We participate as a non-operator in many of these projects. Under these circumstances, we carefully consider the business potential and profitability of projects based on the information and data provided by operators, who has the discretion to control operations of such projects, including decision-making for development and production. In addition to the above-mentioned risks, an operator’s failure in managing those projects may adversely affect our operating results and financial condition.
(10) Risks Due to Competition
Products and services we provide are generally under competition. Other Japanese general trading companies as well as other competitors which engage in similar business activities in various fields may have stronger business associations and relationships with our customers, suppliers and business partners in both domestic and global markets; or stronger global network and regional expertise, diversified global customer bases, greater financial engineering skills and market insights.
Unless we can successfully continue to meet the changing needs of our customers by providing them with innovative and integrated services in a cost effective manner, we may lose our market share or relationships with our existing customers, and we may have an adverse effect on our operating results and financial condition.
(11) Risk Regarding Limitation of Resources on Business
In new businesses, we are investing human resources that are capable of planning and evaluating business, executing projects and managing and supervising workforce. However, in certain business areas, we may have a shortage of required human resources, which could cause a loss of opportunities to start new businesses, which in turn may adversely affect our future business, operating results and financial condition.
(12) Environmental Risks
Various projects and business transactions worldwide we are involved in are subject to extensive environmental laws and regulations. In particular, the Mineral & Metal Resources Segment and Energy Segment may be adversely affected by present or future environmental regulations or enforcement in connection with our exploration, development and production activities. For example, we are subject to complex sets of environmental regulations in Australia, Brazil, Chile, Russia, and the Middle East. These laws and regulations may require us to perform site clean-ups; require us to curtail or cease certain operations; impose fines and payments for significant environmental damage; require us to install costly pollution control equipment; and require us to modify our operations. Newly enacted environmental laws and regulations or changes therein, criticism by stakeholders such as NPOs & NGOs, advise from institutional shareholder service provider and rating by the ESG/SRI research company may materially impact the progress of these projects.
Once an environmental accident occurs, as the owner of mineral resource and energy interests, regardless of the degree of our contribution to such accidents or acts of negligence, we may be imposed to bear fines or payments for compensation from 31 environmental authorities or other concerned parties, even in situations where we have no involvement at all in actual operations as a non-operator. These fines and/or compensation payments may include clean-up costs, compensation for environmental damages, compensation for health hazard and/or property damage to those affected by the accident, compensation for absence from work and/or for loss of earnings.
(13) Risks Associated with Laws and Regulations
Our business operations are subject to extensive laws and regulations in Japan and other countries throughout the world. Our operations are subject to laws and regulations governing, among other things, commodities, consumer protection, business and investment approvals, environmental protection, currency exchange control, import and export (including restrictions from the viewpoint of national and international security), taxation, and antitrust. For instance, many of our infrastructure projects in developing countries are subject to less developed legal systems. As a result, our costs may increase due to factors such as the lack of a comprehensive set of laws and regulations, an unpredictable judicial system based on inconsistent application and interpretation of laws and regulations, and changing practices of regulatory and administrative bodies. For example, we are subject to sudden and unpredictable changes to: tariffs for products and services that we provide; technical specifications with respect to environmental regulations; income tax and duty rates; and foreign currency exchange controls with respect to repatriation of investments and dividends.
Furthermore, while we are involved in the exploration, development and production activities through various contractual arrangements for concessions, the contracts may not be honored or extended when they expire. Moreover, the regulatory bodies of these areas may unilaterally intervene or even alter the contractual terms of our oil and gas as well as mineral resource producing operations involving production rates, pricing formulas, royalties, environmental protection cost, land tenure or otherwise. If these regulatory bodies unilaterally alter such contractual terms, or if the cost of complying with revised or newly established laws and regulations increases, our business, operating results and financial condition could be adversely affected. In order to comply with laws and regulations, we may bear considerable additional costs.
(14) Risks Regarding Employee’s Compliance with Laws, Regulations, and Internal Policies
Due to our size, as well as the operational and geographic breadth of our activities, our day-to-day operations are necessarily de- centralized. As a result, we cannot fully ensure that our employees comply with all applicable laws and regulations as well as our internal policies. For example, our employees may engage in unauthorized trading activities and exceed the allotted market risk exposure for various commodities or extend an unauthorized amount of credit to a client, which, in either case, may result in unknown losses or unmanageable risks. Moreover, our employees could engage in various unauthorized activities prohibited under the laws of Japan or other jurisdictions to which we are subject, including export regulations, anticorruption laws, antitrust laws and tax regulations. The efforts we undertake to ensure employees’ compliance with applicable laws and regulations as well as our internal policies may not succeed in preventing misconduct by our employees. Depending on its nature, employees’ misconduct could have negative effects on our operating results and reputation.
(15) Risks Regarding Internal Control
We are engaged in business activities in a variety of products and services worldwide and thus our internal control over financial reporting needs to be established for numerous transaction patterns. We may be unable to maintain adequate internal control over financial reporting, and thus not be able to assert that our internal control over financial reporting is effective. This could adversely affect the capital market’s perception of us and may cause negative market reactions.
(16) Risks Regarding Climate Changes and Natural Disasters
Initiatives to reduce greenhouse gases, which are said to be the root cause of climate change and global warming, are undertaken globally, such as adoption and ratification of “Paris Agreement” at the 21st Conference of Parties (COP21) in United Nations U.N. Framework Convention on Climate Change. We recognize the significance of Climate Change. Transition risks related to transition to low carbon emission economy (Policy and Legal Risks, Technology Risk, and Market Risk) and physical risks resulting from climate change could adversely affect the operating results of our businesses. As transition risks related to policy and legal risk, introduction of government-imposed greenhouse gas emission restrictions including imposition of carbon tax, and cap and trade schemes of emission credit could adversely affect the operating results of our 32 businesses that use fossil fuel and emit a large amount of greenhouse gasses, such as overseas power producing businesses, and that produce coal, oil, and gas, where we have minority share holdings.
As physical risks, among extreme weather conditions which have been increasing recently due to climate change, intense storms, especially hurricanes and cyclones, which are strong tropical depressions in the Atlantic and South Pacific oceans, respectively, may have an adverse impact on production and shipments of our mineral resources, oil and gas, and salt production operations, leading to increased costs and/or decreased revenues. In the case that production sites, production facilities, and infrastructure used for shipments such as roads, railways and ports, are seriously damaged by extreme weather conditions, operations and shipments could stop for indeterminate periods until restoration work is completed. Extreme weather conditions such as drought could also adversely affect foods raw material producing activities in which we have investments.
Furthermore, natural disaster, such as earthquake, heavy rain or flood, that affects our employees and damages our offices or facilities, may adversely hinder our business. We have implemented measures such as developing a disaster contingency manual, creating a Business Continuity Plan (BCP), introducing a safety confirmation system for employees, reinforcing earthquake resistance, and conducting emergency drills. However, despite these measures, there is no assurance that damage from disasters can be completely avoided.
(17) Risks Regarding Information Systems and Information Securities
As for the worldwide operation of our global communication network, it is important to properly operate the IT system, grasp the information value and handle it properly. We enhance the safety and security of information systems by internal control through development of related regulations to secure properly confidentiality, integrity, and availability on information and information systems for us and our consolidated subsidiaries. We reduce risks on data breaches by improved guidelines for better risk management, and tackle external threats with various measures, including the security monitoring of our IT networks. However, we cannot eliminate all the possibilities of distraction or leakages of confidential business information triggered by unexpected serious IT system troubles, and unforeseeable threats against our IT system infrastructure or communications networks. Such situations could seriously reduce our operational efficiency or jeopardize our ability to maintain or expand our business activities, which may have an adverse impact on our business, operating results and financial condition.
(18) Risks Relating to Terrorists and Violent Groups
We conduct business operations globally, and these conditions are therefore exposed to risk from unexpected situations relating to terrorists and violent groups, as well as trends in politics and social factors. The materialization of such risks may have an adverse impact on our business, operating results and financial condition.
(19) Possibility of difference between the actual dividend amount and the forecasts announced prior to the record date
The customary dividend payout practice of publicly listed companies in Japan may significantly differ from the practice widely followed in other markets. Our dividend payout practice is no exception.
We ordinarily announce a certain dividend payout policy at the beginning of each fiscal year and also provide guidance for annual dividends based on the forecast of our financial results including profit for the year. Interim dividends are paid to shareholders of record on September 30 of each fiscal year after reviewing our financial results during the first six months of each fiscal year as well as our forecast of our financial results during the last six months of the same fiscal year. The decision of declaration and payment is solely a matter of discretion of our Board of Directors, and such a decision may be made after the September 30 record date, and thus may differ from our guidance provided prior to such record date.
The amount and payment of the year-end dividend are determined by our Board of Directors based on the actual financial results including profit for the year. It also requires the approval of shareholders at the annual general meeting held in June of each year, if we propose to declare the year-end dividend. Our Board of Directors decides and submits a proposal for the year-end dividend declaration a few weeks before the annual general meeting. If the shareholders’ approval is given, dividend payments are made to shareholders of record.
The shareholders of record may sell shares after the March 31 record date with the anticipation of receiving a certain dividend payment. However, the declaration of year-end dividends is approved by our shareholders only in June, usually based upon a 33 proposal submitted by our Board of Directors. As such, we may have announced dividend-related forecasts prior to the record date; but, in making a decision on the year-end dividend declaration, neither our shareholders nor our Board of Directors is legally bound by such forecast. Moreover, where our profit for the year turns out to be lower than we originally forecast, we may not submit any year-end dividend proposal to the annual general meeting of shareholders.
(20) Possibility of restriction to sell our common stock because of daily price range limitations under Japanese stock exchange rules
Stock prices on Japanese stock exchanges are determined on a real-time basis by the equilibrium between bids and offers. These exchanges are order-driven markets without specialists or market makers to guide price formation. To prevent excessive volatility, these exchanges set daily upward and downward price range limitations for each stock, based on the previous day’s closing price. Although transactions may continue at the upward or downward limit price if the limit price is reached on a particular trading day, no transactions may take place outside these limits on these exchanges. Consequently, an investor wishing to sell at a price above or below the relevant daily limit on these exchanges may not be able to effect a sale at such price on a particular trading day, or at all.
(21) Necessity of depositary to exercise the rights of shareholders
The rights of shareholders under Japanese law to take actions, including exercising voting rights, receiving dividends and distributions, bringing derivative actions, examining our accounting books and records and exercising appraisal rights are available only to holders recorded on our register of shareholders. Because the depositary, through its custodian agents, is the recorded holder of the shares underlying the ADSs, only the depositary can exercise those rights in connection with the deposited shares. The depositary will make efforts to vote the shares underlying your ADSs as instructed by you and will pay to you the dividends and distributions collected from us. However, as ADS holders, you will not be able to bring a derivative action, examine our accounting books and records or exercise appraisal rights except through and with the consent of the depositary.
34 3. Management's Discussion and Analysis of Financial Position, Operating Results and Cash Flows
Please take note that our management’s discussion and analysis of financial position, operating results and cash flow contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ significantly from those anticipated in these forward-looking statements as a result of the items mentioned in “2. Risk Factors” or other factors. For further information regarding the progress of our plan, see “2. Operating and Financial Review and Prospects, 1. Management Policies, Operating Environment, and Management Issues, (1) Progress of the Medium-term Management Plan.”
(1) Overview of Business Results 1) Operating Results See “(4) Discussion and Analysis of Operating Results for the Years Ended March 31, 2018 and 2017, 2) Operating Results by Operating Segment.”
2) Cash Flows See “(5) Liquidity and Capital Resources, 6) Cash Flows.”
(2) Purchases, Sales Contracts and Trading Transactions 1) Purchases In all operating segments, as the difference between the amount of purchases and the amount of total trading transactions is minimal compared to the amount of total trading transactions, this item is omitted.
2) Sales Contracts In all operating segments, as the difference between the amount of contracts and the amount of total trading transactions is minimal, this item is omitted.
3) Trading Transactions See “(4) Discussion and Analysis of Operating Results for the Years Ended March 31, 2018 and 2017,” and Consolidated financial statements Note 7, “SEGMENT INFORMATION.”
(3) Key Performance Measures under Management’s Discussion
Although our operating results and financial position are affected by various factors including the items stated in “2. Risk Factors,” management believes that as of the end of the fiscal year under review, the following indicators can be usefully employed to discuss trends in our performance and financial condition.
1) Gross Profit, Share of Profit (Loss) of Investments Accounted for Using the Equity Method and Profit for the Year Attributable to Owners of the Parent
We undertake world-wide business activities, involving diversified risk-return profiles, ranging from intermediary services as agent to development and production activities of mineral resources and energy. In this context, changes in the amounts of gross profit, share of profit (loss) of investments accounted for using the equity method and profit for the year attributable to owners of the parent by operating segment reflect the overall progress of our operating results and our businesses.
2) Trends in the Price of and Supply-Demand for Mineral Resources and Energy
Due to the significance to our operating results of the portion that comes from our mineral resources and energy-related businesses, the condition of the market and the production amount for mineral resources and energy has become a significant variable in operating results.
For further information regarding trends and prospects in this field, see the sections relating to the Mineral & Metal Resources Segment and the Energy Segment in “1. Management Policies, Operating Environment, and Management Issues, (2) Operating Environment” and “(4) Discussion and Analysis of Operating Results for the Years Ended March 31, 2018 and 2017, 2) Operating Results by Operating Segment.”
35 3) Cash Flows, Capital Efficiency, and Financial Leverage
From the former Medium-term Management Plan (announced in May 2014), we introduced core operating cash flow (*1) as a measure of cash flow generation capabilities and source of cash reallocation. We also utilize core operating cash flow as a key performance measure under the Medium-term Management Plan (announced in May 2017) started from the year ended March 31, 2018.
Mitsui decides the policies on levels of shareholders’ equity (*2), return on equity (ROE), and also debt and equity balances, and examines the status of execution in terms of stability for capital efficiency as well as financing. Mitsui also examines the scale of shareholders’ equity in terms of risk buffer to maximum exposure to potential losses due to a deterioration of the respective business and is monitoring and managing group-wide financial leverage seeking to secure an efficient return on equity as well as maintaining and improving credit ratings and financial stability in order to refinance our interest-bearing debt. For further information regarding our capital management, see Note 9, “DISCLOSURES ABOUT FINANCIAL INSTRUMENTS AND RELATED MATTERS, (6) Risk-related matters.” For further information regarding our financial policy, see “(5) Liquidity and Capital Resources.”
(*1) Core operating cash flow is cash flows from operating activities without the net cash outflow from an increase in working capital. (*2) Shareholders’ equity is total equity attributable to owners of the parent in the Consolidated Statements of Financial Position.
(4) Discussion and Analysis of Operating Results for the Years Ended March 31, 2018 and 2017
1) Analysis of Consolidated Income Statements
(Billions of Yen) Current Year Previous Year Change
Revenue 4,892.1 4,364.0 +528.1
Gross profit 790.7 719.3 +71.4
Selling, general and administrative expenses (571.7) (539.0) (32.7) Gain (Loss) on Securities and Other 55.1 65.0 (9.9) Investments—Net Impairment Reversal (Loss) of Fixed (25.5) (5.7) (19.8) Assets—Net Other Income Gain (Loss) on Disposal or Sales of Fixed (Expenses) 15.1 11.0 +4.1 Assets—Net Other Income (Expense)—Net 15.8 9.9 +5.9
Provision Related to Multigrain Business (25.0) - (25.0)
Interest Income 36.5 34.9 +1.6 Finance Dividend Income 84.8 51.9 +32.9 Income (Costs) Interest Expense (66.5) (57.0) (9.5) Share of Profit (Loss) of Investments Accounted for Using 234.9 170.6 +64.3 the Equity Method Income Taxes (103.1) (134.6) +31.5
Profit for the Year 441.3 326.2 +115.1
Profit for the Year Attributable to Owners of the Parent 418.5 306.1 +112.4 * May not match with the total of items due to rounding off. The same shall apply hereafter.
36 Revenue
Under IFRS, revenue is reported based on the gross amount billed to a customer or on the net amount retained (that is, the amount billed to a customer less the amount paid to a supplier) in accordance with degree of risk against reward in the following manner.
• Revenue is reported based on gross amounts for transactions where we have the related risks and rewards of ownership such as transactions mainly where we are the primary obligor in the arrangement and/or assume general inventory risk without any significant mitigation of our risk level.
• Revenue is reported based on net amounts where we assume a low degree of related risks and rewards, effectively acting as an agent for the applicable products or services. A typical example of reporting revenue based on net amounts is a transaction where we receive a commission or fee at a fixed rate based on transaction volume or amount.
We classified our revenue into sale of products, rendering of services and other revenue with the corresponding costs of revenue.
The table below provides these three categories of revenue by operating segment.
Billions of Yen
Current Year Previous Year Change Rendering Rendering Rendering Sale of Other Sale of Other Sale of Other of Total of Total of Total Products Revenue Products Revenue Products Revenue Services Services Services Iron & Steel Products ……………… ¥211.6 ¥26.6 ¥0.0 ¥238.2 ¥176.7 ¥25.7 ¥0.0 ¥202.4 ¥34.9 ¥0.9 ¥0.0 ¥35.8 Mineral & Metal Resources ………… 936.5 9.7 0.2 946.4 738.7 7.5 0.2 746.4 197.8 2.2 0.0 200.0 Machinery & Infrastructure ………… 271.3 102.4 73.4 447.1 243.3 96.1 69.2 408.5 28.0 6.3 4.2 38.6 Chemicals …………………………… 1,113.8 56.7 16.1 1,186.7 972.2 50.4 14.7 1,037.3 141.6 6.3 1.4 149.4 Energy ……………………………… 533.5 5.0 (4.2) 534.3 455.9 4.7 3.0 463.6 77.6 0.3 (7.2) 70.7 Lifestyle …………………………… 1,237.3 158.8 13.3 1,409.4 1,219.1 146.8 12.3 1,378.3 18.2 12.0 1.0 31.1 Innovation & Corporate 26.3 76.5 24.6 127.3 27.3 74.4 23.6 125.2 (1.0) 2.1 1.0 2.1 Development ……………………… Total ………………………………… 4,330.3 435.6 123.4 4,889.4 3,833.1 405.5 123.0 4,361.7 497.2 30.1 0.4 527.7 All Other …………………………… 0.5 0.1 1.3 1.9 0.4 0.0 1.5 1.9 0.1 0.1 (0.2) 0.0 Adjustments and Eliminations ……… 0.0 0.8 0.0 0.8 0.0 0.4 0.0 0.4 0.0 0.4 0.0 0.4 Consolidated Total ………………… ¥4,330.8 ¥436.6 ¥124.7 ¥4,892.1 ¥3,833.6 ¥405.9 ¥124.5 ¥4,364.0 ¥497.2 ¥30.7 ¥0.2 ¥528.1
Sale of products
Sale of products is revenue from sales transactions of products and mainly includes the following four types of transactions:
• the sale of products as a principal in the various transactions; • the sale of manufactured products in the wide range of industries such as metals, chemicals, foods and machinery; • the sale of natural resources from iron ore, copper, and coal mining activities and oil and gas producing activities; and • the development and sale of real estate.
Rendering of services
Rendering of services includes the revenue from trading margins and commissions related to various trading transactions in which we act as a principal or an agent. For example:
• We provide various services such as logistics and warehouse services, information and communication services and technical support. In these cases, the billed amounts for these services are recognized as revenue. • We facilitate arrangement of the contracts between manufacturers and customers and deliveries of the products between suppliers, and also enter into back-to-back sales and purchase transactions of products. In these cases, the net amounts of sale and purchase prices (namely, margins for our intermediary services) are recognized as revenue.
37 Other revenue
Other revenue principally includes the revenue from:
• derivative commodity instruments and derivative financial instruments held for trading purposes; • the revenue from leasing activities of real estate, rolling stock, aircraft, ships and machinery equipment; and • the revenue from external consumer financing.
Gross Profit
Mainly the Energy Segment and the Mineral & Metal Resources Segment reported an increase in gross profit, while the Chemicals Segment recorded a decline.
Other Income (Expenses)
Selling, general and administrative expenses
The table below provides a breakdown of selling, general and administrative expenses used for our internal review.
Billions of Yen Current Year Previous Year Change Personnel ……………………………………. ¥297.1 ¥283.8 ¥13.3 Welfare ……………………………………… 12.2 13.0 (0.8) Travel ……………………………………….. 29.8 28.1 1.7 Entertainment ……………………………….. 7.0 6.7 0.3 Communication ……………………………... 45.8 47.4 (1.6) Rent …………………………………………. 27.5 27.1 0.4 Depreciation ………………………………… 14.4 13.4 1.0 Fees and Taxes ……………………………… 16.9 10.8 6.1 Provision for Doubtful Receivables ………… 20.3 9.2 11.1 Others ……………………………………….. 100.7 99.5 1.2 Total ………………………………………… ¥571.7 ¥539.0 ¥32.7
The table below provides selling, general and administrative expenses broken down by operating segment. Billions of Yen Current Year Previous Year Change Iron & Steel Products ……………………….. ¥32.1 ¥35.0 ¥(2.9) Mineral & Metal Resources ………………… 44.4 31.8 12.6 Machinery & Infrastructure ………………… 121.5 115.9 5.6 Chemicals …………………………………… 96.6 93.5 3.1 Energy ………………………………………. 42.1 43.1 (1.0) Lifestyle …………………………………….. 153.0 139.5 13.5 Innovation & Corporate Development ……… 50.8 50.2 0.6 Total ………………………………………… 540.5 509.0 31.5 All Other ……………………………………. 30.7 22.5 8.2 Adjustments and Eliminations ……………… 0.5 7.5 (7.0) Consolidated Total ………………………….. ¥571.7 ¥539.0 ¥32.7
38 Gain (loss) on securities and other investments—net
For the current year, a gain on securities was recorded in the Mineral & Metal Resources Segment, while a gain and a loss on securities were recorded in the Machinery & Infrastructure Segment. Furthermore, losses on securities were recorded in the Lifestyle Segment and the Innovation & Corporate Development Segment. For the previous year, gains on securities were recorded in the Mineral & Metal Resources Segment, the Lifestyle Segment, the Machinery & Infrastructure Segment and the Innovation & Corporate Development Segment.
Impairment reversal (loss) of fixed assets—net
For the current year, an impairment loss on fixed assets was recorded in the Lifestyle Segment and the Machinery & Infrastructure Segment.
Gain (Loss) on disposal or sales of fixed assets—net
For the current year, a gain on disposal of fixed assets was recorded in the Lifestyle Segment and the Innovation & Corporate Development Segment. For the previous year, a gain on disposal of fixed assets was recorded in the Lifestyle Segment.
Other income (expense)—net
The Iron & Steel Products Segment recorded a valuation profit on the derivative in relation to a price adjustment clause for an investment in an equity accounted investee and exploration expenses declined mainly in the Energy Segment.
Provision Related to Multigrain Business
The Lifestyle Segment recorded a provision related to Multigrain business due to the deterioration of the business environment.
Finance Income (Costs) Dividend Income Mainly the Energy Segment and the Mineral & Metal Resources Segment reported an increase.
Share of Profit (Loss) of Investments Accounted for Using the Equity Method Mainly the Machinery & Infrastructure Segment, the Mineral & Metal Resources Segment and the Energy Segment recorded an increase.
Income Taxes ・For the current year, deferred tax liabilities on the investment into Valepar S.A. were reversed. Furthermore, deferred tax liabilities on equity accounted investments were reversed upon receiving dividends from those investees, and deferred tax liabilities were reversed due to the U.S. tax reform. On the other hand, income taxes for the current year increased as profit before income taxes for the current year increased by ¥83.6 billion, and deferred tax assets on equity accounted investments as well as Multigrain Trading AG were reversed. ・The effective tax rate for the current year was 18.9%, a decline of 10.3% from 29.2% for the previous year. The aforementioned reversal of deferred tax liabilities resulted in the decline, while the reversal of deferred tax assets caused an increase.
Profit for the Year Attributable to Owners of the Parent Profit for the year attributable to owners of the parent was ¥418.5 billion, an increase of ¥112.4 billion from the previous year.
39 2) Operating Results by Operating Segment
Effective April 1, 2017, the region-focused reporting segments were aggregated into product-focused reporting segments, and the allocation of overhead costs and income taxes to reporting segments was changed. In accordance with the aforementioned changes, the operating segment information for the previous year has been restated to conform to the operating segments as of April 2017.
Iron & Steel Products Segment
(Billions of Yen) Current Year Previous Year Change Profit for the year attributable to owners of the parent 24.7 10.9 +13.8 Gross profit 41.9 36.7 +5.2 Profit (loss) of equity method investments 13.3 11.1 +2.2 Dividend income 2.5 2.8 (0.3) Selling, general and administrative expenses (32.1) (35.0) +2.9 Others (0.9) (4.7) +3.8
The following factors mainly affected results: ・For the current year, a valuation profit on the derivative of ¥4.8 billion was recorded in relation to a price adjustment clause for the investment in Gestamp Automoción S.A. ・For the current year, Game Changer Holdings reported a gain of ¥3.5 billion due to a reversal of deferred tax liability upon the U.S. tax reform.
Mineral & Metal Resources Segment
(Billions of Yen) Current Year Previous Year Change Profit for the year attributable to owners of the parent 257.6 144.3 +113.3 Gross profit 206.8 176.8 +30.0 Profit (loss) of equity method investments 61.8 48.5 +13.3 Dividend income 16.4 2.0 +14.4 Selling, general and administrative expenses (44.4) (31.8) (12.6) Others 17.0 (51.2) +68.2
Gross profit increased mainly due to the following factors: ・Iron ore mining operations in Australia reported an increase of ¥13.6 billion due to higher iron ore prices. ・Coal mining operations in Australia reported an increase of ¥12.3 billion due to higher coal prices. Profit (loss) of equity method investments increased mainly due to the following factors: ・Inversiones Mineras Acrux SpA, a copper mining company in Chile, reported an increase of ¥11.7 billion mainly due to a reversal effect of impairment loss for the previous year, its reversal for the current year and higher copper prices. ・Compañía Minera Doña Inés de Collahuasi, a copper mining company in Chile, reported an increase of ¥5.1 billion mainly due to higher copper prices. ・Valepar S.A. declined by ¥9.6 billion mainly due to the incorporation by Vale S.A. in the three month period ended September 30, 2017. For the current year, a dividend from Vale S.A. of ¥8.7 billion was recorded. In addition to the above, the following factors also affected results: ・Following the incorporation of Valepar S.A. by Vale S.A., the Mineral & Metal Resources Business Unit reported a gain on securities of ¥56.3 billion and the reversal of deferred tax liability of ¥35.2 billion for the taxable temporary differences on the investment in Valepar S.A. ・For the current year, following the dividend received from Inner Mongolia Erdos Electric Power & Metallurgical Ltd, the reversal of deferred tax liability for the taxable temporary differences on the equity accounted investment was reported. ・For the previous year, as a result of the deconsolidation of Sims Metal Management from an equity accounted investee, a profit of ¥26.9 billion on securities was recorded.
40 ・For the current year, a provision of ¥14.7 billion for doubtful debt and an impairment loss on an equity accounted investment of ¥3.9 billion were posted, reflecting the revisions to our various assumptions regarding SCM Minera Lumina Copper Chile, the project company for the Caserones Copper Mine.
Sensitivity for Fluctuations in Iron Ore Prices and Our Equity Share of Productions Fluctuations in iron ore prices directly affect revenues from the equity share of production at our iron ore subsidiaries and equity accounted investees. For the year ending March 31, 2019, we estimate that the impact of a change of US$1 per ton in the iron ore price on profit for the year attributable to owners of the parent would be approximately ¥2.3 billion. For the year ended March 31, 2018, the equity share of production amounted to 60.9 million tons of iron ore (including 15.3 million tons after Vale’s deconsolidation). The above-mentioned effect of a change of US$1 per ton is calculated based on the assumptions of an estimated increase or decrease in shipments in the year ending March 31, 2019, in line with our holdings through subsidiaries and equity accounted investees after the year ended March 31, 2018, and a specific range of foreign exchange rates for the U.S. dollar and other related currencies. As the value of natural resource producing countries’ currencies, such as the Australian dollar, generally trends to be highly correlated to the market prices of those countries’ products, the change in the currencies may impact the local currency denominated revenues of our overseas subsidiaries and equity accounted investees.
Machinery & Infrastructure Segment
(Billions of Yen) Current Year Previous Year Change Profit for the year attributable to owners of the parent 89.6 66.8 +22.8 Gross profit 121.9 114.5 +7.4 Profit (loss) of equity method investments 96.5 64.3 +32.2 Dividend income 3.4 3.0 +0.4 Selling, general and administrative expenses (121.5) (115.9) (5.6) Others (10.7) 0.9 (11.6)
Gross profit increased mainly due to the following factor: ・Mitsui & Co. Plant Systems, Ltd. reported an increase of ¥3.4 billion reflecting a higher volume of sales in the electricity business. Profit (loss) of equity method investments increased mainly due to the following factors: ・IPP businesses recorded an increase of ¥37.8 billion. - For the current year, ¥20.3 billion in gains on the sales of interests in the UK IPP business were recorded. - For the previous year, impairment loss on the intangible asset has been recorded in relation to previously purchased IPP business. - For the previous year, a loss in relation to closure of a power plant in Australia was recorded. - Mark-to-market valuation losses, such as those on long-term derivative contracts, were improved by ¥2.6 billion to ¥0.6 billion from a ¥2.0 billion loss for the previous year. - The IPP business in Indonesia recorded a decline of tax burden due to the Indonesian tax reform for the previous year, while it recorded a ¥3.9 billion gain due to its refinance for the current year. ・Penske Automotive Group, Inc. recorded an increase of ¥4.8 billion mainly due to the U.S. tax reform. ・For the current year, a loss was recorded at an equity accounted investee due to an anticipated deterioration of an overseas project. ・For the current year, reserves of ¥5.1 billion for financing projects in Latin America were recorded. ・For the current year, a loss was recorded due to an impairment loss incurred for the overseas rail business. In addition to the above, the following factors also affected results: ・For the previous year, a gain of ¥5.8 billion due to sale of the wind power generation business in Australia was recorded. ・For the previous year, other income was recorded due to receipt of adjustment fees in relation to the purchase price of an IPP business. ・For the current year, an impairment loss of ¥5.4 billion on fixed assets was recorded in relation to container terminal development and operation. ・For the previous year, a gain on sale of a stake in relation to the aviation business of ¥4.1 billion was reported.
41 ・For the current year, a financing subsidiary of the IPP business in Indonesia recorded a loss of ¥4.1 billion due to the refinance. ・For the current year, a holding company for UK IPP business recorded a valuation loss of ¥3.5 billion on securities, following the sale of interests. ・For the current year, following the dividend received from the IPP project, the reversal of deferred tax liability for the taxable temporary differences on the equity accounted investment was reported. ・For the current year, a gain on a partial sale of an equity accounted investment was recorded.
Chemicals Segment
(Billions of Yen) Current Year Previous Year Change Profit for the year attributable to owners of the parent 34.2 32.7 + 1.5 Gross profit 136.6 145.6 (9.0) Profit (loss) of equity method investments 11.3 3.9 +7.4 Dividend income 2.3 1.9 +0.4 Selling, general and administrative expenses (96.6) (93.5) (3.1) Others (19.4) (25.2) +5.8
Gross profit declined mainly due to the following factor: ・Novus International, Inc. reported a decline of ¥16.9 billion mainly due to lower methionine prices. In addition to the above, the following factor also affected results: ・For the current year, Intercontinental Terminals Company LLC reported a gain of ¥8.4 billion due to a reversal of deferred tax liabilities upon the U.S. tax reform
Energy Segment
(Billions of Yen) Current Year Previous Year Change Profit for the year attributable to owners of the parent 48.6 31.7 +16.9 Gross profit 96.8 63.9 +32.9 Profit (loss) of equity method investments 24.5 17.1 +7.4 Dividend income 51.9 32.6 +19.3 Selling, general and administrative expenses (42.1) (43.1) +1.0 Others (82.5) (38.8) (43.7)
Gross profit increased mainly due to the following factors: ・Mitsui Oil Exploration Co., Ltd. recorded an increase of ¥17.1 billion mainly due to a decrease in costs and the effect of foreign currency fluctuation. ・Mitsui E&P USA LLC reported an increase of ¥9.7 billion mainly due to higher gas prices and an increase in production. ・MEP Texas Holdings LLC reported an increase of ¥4.9 billion mainly due to higher crude oil prices. ・Mitsui E&P Middle East B.V. reported an increase of ¥4.5 billion mainly due to higher crude oil prices and an increase in production. ・Mitsui E&P Australia Pty Ltd reported an increase of ¥4.4 billion mainly due to higher crude oil prices. ・Westport Petroleum Inc. reported a decrease of ¥3.7 billion from its trading operations. Profit of equity method investment increased mainly due to the following factor: ・Japan Australia LNG (MIMI) Pty. Ltd. reported an increase due to higher crude oil prices. Dividends from six LNG projects (Sakhalin II, Qatargas 1, Abu Dhabi, Oman, Qatargas 3 and Equatorial Guinea) were ¥50.1 billion in total, an increase of ¥19.7 billion from the previous year. In addition to the above, the following factors also affected results: ・For the current year, MEPUS Holdings LLC, a holding company of U.S. shale gas and oil production business, reported a loss of ¥14.9 billion due to a reversal of deferred tax assets following the U.S. tax reform.
42 ・For the current year, exploration expenses of ¥7.0 billion in total were recorded, including those recorded by Mitsui Oil Exploration Co., Ltd. For the previous year, exploration expenses of ¥7.5 billion in total were recorded, including those recorded by Mitsui Oil Exploration Co., Ltd.
Sensitivity for Fluctuations in Oil and Gas Prices and Our Equity Share of Productions Our equity share of production amount of oil and gas for the year ended March 31, 2017 was 243 million barrels (gas is converted to barrels of oil at the ratio of 5,800 cubic feet of natural gas to 1 barrel of crude oil, includes equity share of interests of consolidated subsidiaries, equity accounted investees and non-consolidated interests), and the equity share of production for the year ended March 31, 2018 was 244 million barrels (same as above). For the year ending March 31, 2019, a change of US$1 per barrel in crude oil prices is estimated to have an effect of ¥2.9 billion on profit for the year attributable to owners of the parent as a result of changes in revenues of our oil and gas related subsidiaries and associated companies. We have ceased to disclose our equity share of production amount in accordance with the U.S. Securities and Exchange Commission standards from the current year. Similar to the discussion regarding mineral and metal resources, actual results of operations are also influenced by production, costs, trends in foreign exchange rates and other factors surrounding those subsidiaries and equity accounted investees.
Lifestyle Segment
(Billions of Yen) Current Year Previous Year Change Profit (loss) for the year attributable to owners of the parent (26.3) 25.4 (51.7) Gross profit 139.5 136.2 +3.3 Profit (loss) of equity method investments 22.8 24.1 (1.3) Dividend income 4.3 4.3 0.0 Selling, general and administrative expenses (153.0) (139.5) (13.5) Others (39.9) 0.3 (40.2)
Gross profit increased mainly due to the following factors: ・XINGU AGRI AG reported an increase of ¥4.0 billion mainly due to the reversal effect of the drought in the previous year. ・Multigrain Trading AG reported a decline of ¥4.2 billion mainly due to the poor performance of the origination and merchandising business. Profit (loss) of equity method investments declined mainly due to the following factors: ・Ventura Foods LLC reported a decline of ¥3.9 billion mainly due to the poor performance of the edible oil products business. ・Panasonic Healthcare Holdings Co., Ltd. (now called PHC Holdings Corporation) reported an increase as a new contributor. In addition to the above, the following factors also affected results: ・For the current year, Multigrain Trading AG recorded a provision of ¥25.5 billion due to the deterioration of the business environment, tax expenses of ¥8.6 billion mainly resulting from the reversal of deferred tax assets and losses of ¥4.1 billion mainly related to asset impairments. ・For the previous year, a ¥14.6 billion gain on sale of shares was recorded due to the partial sale of shares in IHH Healthcare Berhad. ・For the current year, XINGU AGRI AG recorded an impairment loss on fixed assets of ¥11.3 billion due to a decline in the value of land. ・For the current year, MBK Healthcare Network Ltd. recorded an impairment loss on securities of ¥5.9 billion due to the revision of the future business plan for DaVita Care Pte. Ltd., in which MBK Healthcare Network Ltd. invested. ・For the current year, the Lifestyle Segment recorded a gain on the reversal of deferred tax liability of ¥8.3 billion due to the liquidation of MBK Healthcare Partners Limited, which held IHH Healthcare Berhad. ・For the current and previous years, Mitsui & Co. Real Estate Ltd. recorded a gain on the sales of buildings in Japan.
43 Innovation & Corporate Development Segment
(Billions of Yen) Current Year Previous Year Change Profit (loss) for the year attributable to owners of the parent (4.6) 11.0 (15.6) Gross profit 45.1 45.0 +0.1 Profit (loss) of equity method investments 5.0 2.1 +2.9 Dividend income 2.7 4.1 (1.4) Selling, general and administrative expenses (50.8) (50.2) (0.6) Others (6.6) 10.0 (16.6)
Gross profit increased mainly due to the following factors: ・A ¥4.5 billion gain was recorded due to the valuation gains of fair value on shares for the current year in Hutchison China MediTech Ltd. ・For the current year, a gain was recorded due to the valuation gains of fair value on shares in a Japanese company. ・For the current year, a ¥6.0 billion loss was recorded due to the valuation losses of fair value on shares of a high speed mobile data network operator in developing countries. In addition to the above, the following factors also affected results: ・For the previous year, a profit of ¥4.8 billion on securities of Hutchison China MediTech Ltd was recorded. ・A decline of ¥3.8 billion was recorded at an equity accounted investee due to an anticipated deterioration in relation to an investment. ・For the current year, a loss of ¥3.1 billion on securities of Naaptol Online Shopping Pvt. Ltd. was recorded. ・For the current year, a gain on the sales of warehouses in Japan was recorded.
(5) Liquidity and Capital Resources
Use of Non-GAAP Financial Measures
Net Debt-to-Equity Ratio
We refer to “Net Debt-to-Equity Ratio” (“Net DER”) in this “Liquidity and Capital Resources” and elsewhere in this report. Net DER is comprised of “net interest-bearing debt” divided by total equity attributable to owners of the parent.
We define “net interest-bearing debt” as follows: - calculate interest-bearing debt by adding up short-term debt and long-term debt - calculate net interest-bearing debt by subtracting cash and cash equivalents and time deposits with maturities within one year after three months from interest-bearing debt
Our management considers that Net DER is a useful measure for investors to review the balance between interest-bearing debt and total equity attributable to owners of the parent for the purpose of improving our capacity to meet debt repayment and leverage to improve return on equity in our capital structure.
“Net interest-bearing debt” and “Net DER” are presented in the table below.
As of March 31, 2018 As of March 31, 2017
(Billions of Yen) (Billions of Yen) Short-term debt 201.6 304.6 Long-term debt 4,025.4 4,497.0 Interest bearing debt 4,226.9 4,801.6 Less cash and cash equivalents and time deposits (1,137.7) (1,519.5) Net interest bearing debt 3,089.2 3,282.1 Total equity attributable to owners of the parent 3,974.7 3,732.2 Net DER (times) 0.78 0.88
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Free Cash Flow
We define “free cash flow” as the sum of net cash provided by/(used in) operating activities and net cash provided by/(used in) investing activities. Our management believes that such indicator is useful for investors to measure available net cash for strategic investments and/or for debt repayments, or the extent of reliance on borrowings from outside sources to procure funds.
The following table shows how we calculated free cash flow.
Year ended Year ended Increase/(Decrease) March 31, 2018 March 31, 2017 (Billions of Yen) (Billions of Yen) (Billions of Yen) Cash flows from operating activities 553.6 404.2 +149.4 Cash flows from investing activities (248.2) (353.3) +105.1 Free cash flow 305.4 50.9 +254.5
1) Funding and Treasury Policies
Our basic funding policy as set forth by our management is to secure liquidity required for our smooth operations and to maintain the strength and soundness of our balance sheet. Thus, our principal strategy is to obtain long-term funds (those with maturities of around 10 years) from financial institutions, including domestic life-insurance companies and banks, and through the issuance of corporate bonds. At the same time, we minimize our refinance risk by deconcentrating the amount of long-term debt to be repaid each fiscal year. In cases of projects where large amounts of financing are required, we utilize financing programs provided by government financing agencies and/or project financing.
In principle, wholly owned subsidiaries procure funds not from financial institutions, but by utilizing the internal Cash Management Service, in which they can procure financing from financing subsidiaries and overseas offices of the Company. Through this service, centralization of fund raising, the efficient use of fund and securement of liquidity are promoted. As a result, approximately three fourths of total interest-bearing debt on a consolidated basis as of March 31, 2018 was raised by Mitsui and the above-mentioned financing subsidiaries.
We also hold sufficient cash and cash equivalents in order to maintain liquidity to flexibly meet capital requirements and to minimize the harmful effects of a deteriorated financial market on future debt-service requirements. While there is no particular target amount of cash and cash equivalents to be held, considering the current financial market conditions, cash and cash equivalents are invested mainly in highly liquid and highly rated short-term financial instruments, or deposited.
2) Funding Sources
In accordance with our basic funding policy above, we choose the most favorable funding sources from various forms of direct and indirect financing by suitable means considering the financial condition at that point of time.
We procure necessary funds, mainly long-term, based on our longstanding and wide-ranging relations with financial institutions in Japan and overseas. In addition, we borrow from government financing agencies such as Japan Bank for International Cooperation, and also utilize project financing.
In addition to these funding sources, Mitsui maintains various means of procuring direct financing, such as a ¥200 billion debt shelf-registration, a ¥2,400 billion commercial paper program in Japan, and Euro medium-term note ("MTN") program of US$5 billion, and utilizes the method among these that is favorable depending on the financial situation. Outstanding domestic bonds under shelf-registration and notes under the MTN program as of March 31, 2018 were ¥170 billion and ¥15.9 billion, respectively. For raising short-term funds overseas, Mitsui & Co. (U.S.A.), Inc. has a US$1.5 billion U.S. domestic commercial paper program, Mitsui & Co. Financial Services (Europe) Ltd. also has a US$1.5 billion Euro commercial paper program, and there are similar commercial paper programs in certain other overseas markets and these programs are utilized where appropriate. However we maintain the principal strategy of carrying out long-term and stable fund procurement, and we do not rely on fund procurement means such as commercial paper or short-term loans. As a result, the proportion of short-term debt to total interest- bearing debt on a consolidated basis was 4.8% as of March 31, 2018.
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Mitsui and certain subsidiaries set lines of credit by paying commitment fees to financial institutions. For unused lines of credit for borrowing, including these lines of credit with fees, see Note 9, “DISCLOSURES ABOUT FINANCIAL INSTRUMENTS AND RELATED MATTERS (6) Risk-related matters”
A vast majority of interest-bearing debt is denominated in Japanese yen and U.S. dollars. Considering the type of interest and currency of the asset-side, we employ certain derivative financial instruments, which include interest rate swaps, currency swaps and foreign currency exchange forward contracts to convert the interest or currency of our liabilities. We believe that the proportion of interest-bearing debt with fixed interest rate after taking into account interest rate swaps is appropriate considering the condition of our current financial position. See Note 9, “DISCLOSURES ABOUT FINANCIAL INSTRUMENTS AND RELATED MATTERS” for further description of our derivative financial instruments. Additionally, regarding liquidity analysis related to derivative instruments, see Note 16, “DISCLOSURES ABOUT FINANCIAL AND OTHER TRADE LIABILITIES.”
Credit Ratings
To facilitate smooth fund raising from capital markets, Mitsui has obtained ratings from Rating and Investment Information, Inc. (“R&I”), Moody’s Japan K.K. (“Moody’s”) and Standard & Poor’s Ratings Japan K.K. (“S&P”). The ratings as of May 31, 2018 were as follows:
R&I Moody’s S&P Short-term rating a-1+ P-2 A-1(**) (Long-term) Issuer rating AA- — A Long-term issue rating AA- A3(*) — Medium-term note rating AA- A3 A Outlook Stable Stable Stable (*) The terminology used at Moody’s is “Long-Term Obligation Ratings (senior unsecured).” (**) The terminology used at S&P is “Short-Term Issuer Credit Ratings.”
Mitsui intends to maintain sound financial foundations and will strive to maintain and improve its credit rating.
Credit ratings are assessments by the rating agencies of the credit risks associated with us and are based on information provided by us and other sources that the rating agencies consider reliable. Credit ratings do not constitute a recommendation to buy, sell or hold securities and are subject to change or withdrawal by each of the rating agencies at any time. Each rating agency has different criteria in evaluating the risk associated with a company.
3) Liquidity Management
Cash and cash equivalents were ¥1,131.4 billion as of March 31, 2018. Approximately half of cash and cash equivalents are denominated in Japanese yen and our management recognizes that cash and cash equivalents as of March 31, 2018 satisfy the liquidity requirements for the repayment of short-term debt (¥201.6 billion) and current maturities of long-term debt (¥482.6 billion).
In the global economy during the year ended March 31, 2018 under review, the global economy saw ongoing gradual growth in both developed countries supported by firm spending and investment. We steadily procured necessary funds in accordance with our basic funding policy by utilizing our good long-term relationship with financial institutions and various measures implemented by public financing agencies. On the other hand, there are uncertainties in the financial landscape, such as the escalation of geopolitical risk surrounding the Middle East, the future prospects for the European and U.S. economies, which have shown signs of maturity in some parts, the impact of the Federal Reserve Board's monetary tightening on the economies of emerging countries, and trends in U.S. trade policy. Thus, we consider it necessary to continue to closely monitor the prospects for liquidity.
As a result, our interest-bearing debt outstanding as of March 31, 2018, totaled ¥4,226.9 billion, an decrease of ¥574.7 billion from the previous fiscal year-end, and the proportion of long-term debt to total interest-bearing debt on a consolidated basis was 95.2%. Subordinated syndicated loans accounted for ¥555.0 billion of the interest-bearing debt. Rating agencies treat 50% of this
46 balance, or ¥277.5 billion, as equity. The maturity profile of our outstanding debt as of March 31, 2018 was as follows. For the details of the long-term debt and interest rate structure of our outstanding debt as of March 31, 2018, see Note 16, “DISCLOSURES ABOUT FINANCIAL AND OTHER TRADE LIABILITIES.”
Year ending March 31: 2019 2020 2021 2022 2023 Thereafter Total Billions of Yen 482.6 454.8 338.8 348.2 297.9 2,103.2 4,025.4
Total equity attributable to owners of the parent as of March 31, 2018 was ¥3,974.7 billion, an increase of ¥242.5 billion from March 31, 2017. Also, net interest-bearing debt was ¥3,089.2 billion, an decrease of ¥192.9 billion, and as a result, the Net DER decreased to 0.78 times as of March 31, 2018 from 0.88 times as of March 31, 2017.
The ratio of current assets to current liabilities, which was 177.3% as of March 31, 2017, was 156.6% as of March 31, 2018.
Judging by the numbers above and current market conditions, the financial strength of our balance sheet is maintained, and at this stage we are not aware of any significant financial difficulties that would affect our operations including investments and loans in accordance with our Medium-term Management Plan.
Although we provide payment guarantees to third parties and related parties, these guarantees do not include those that have substantial impacts on our liquidity. For details on guarantees issued by us and future obligations, see Note 25, “CONTINGENT LIABILITIES.”
With the exception of non-recourse financing for individual projects, it is our policy not to conclude agreements for important financial transactions with financial institutions that contain additional debt restriction clauses that may cause acceleration of our obligations, including debt incurrence restrictions, negative pledges, restrictions on dividend payments and various financial ratio limits, and there are no material financial covenants in the agreements undertaken.
Our management believes that our liquidity will not be affected by dividends from our foreign consolidated subsidiaries and equity accounted investees. Assuming that such companies have sufficient distributable net assets or retained earnings as provided under the local laws of the relevant jurisdictions, there are no material, contractual or legal restrictions on the ability of our consolidated subsidiaries and equity accounted investees to transfer funds to us in the form of dividends and other distributions. There are no material economic restrictions on payments of dividends and other distributions by them other than general withholding or other taxes calculated at the rates determined by the local tax laws of the relevant jurisdictions.
We plan to contribute ¥14.9 billion to our defined-benefit pension plans for the year ending March 31, 2019.
4) Investments and Loans, Financial Policies
In the year ended March 31, 2018, Cash inflows amounted to approximately ¥970.0 billion, consisting of core operating cash flow of approximately ¥670.0 billion generated as a result of steady improvement in operating results and increases in dividends from our equity accounted investees, and inflows of approximately ¥300.0 billion generated through sound asset recycling. Moreover, whereas investment and loans (*) were held to approximately ¥560.0 billion due to strict investment discipline, cash outflows amounted to approximately ¥732.5 billion as a result of having provided total shareholder returns of approximately ¥172.5 billion. As such, we marked very favorable progress having achieved approximately ¥237.5 billion in positive free cash flow (**) after furnishing shareholder returns. See “6) Cash Flows,” for further description of cash flows for the year ended March 31, 2018.
(*) Investments and loans based on investing cash flows excluding an increase or decrease of time deposits. (**) Free cash flow excluding the effect of changes in working capital and time deposits.
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We have updated the cumulative total of cash flow allocations for the three years of the Medium-term Management Plan, upon taking into account financial results for the fiscal year ended March 31, 2018, and targets for the fiscal year ending March 31, 2019. For the details of the updated cash flow allocations, see “1. Management Policies, Operating Environment, and Management Issues, (3) Business Plan for the Year Ending March 31, 2019, 3) Cash Flow Allocation Results and Latest Forecast (over the three-year period of the Medium-term Management Plan on a cumulative basis)” and for the details of refinancing, see “1) Funding and Treasury Policies” and “2) Funding Sources.”
Final investment decisions on many of the projects in the Latest Forecast of Cash Flow Allocation (FY Mar/18 – Mar/20 cumulative) have not been made and the progress of such projects will have an effect on our actual cash flows and financial condition.
5) Assets, Liabilities and Shareholders' Equity
(Billions of yen) March 31, 2018 March 31, 2017 Change Total Assets 11,306.7 11,501.0 (194.3) Current Assets 4,226.2 4,474.7 (248.5) Non-current Assets 7,080.5 7,026.3 +54.2 Current Liabilities 2,698.8 2,524.0 +174.8 Non-current Liabilities 4,389.8 4,986.9 (597.1) Total Equity Attributable to Owners of the Parent 3,974.7 3,732.2 +242.5
Assets Current Assets: ・Cash and cash equivalents declined by ¥372.4 billion, mainly due to repayment of debt. ・Trade and other receivables increased by ¥26.6 billion, mainly because trading volume increased in the Energy Segment, prices and trading volume increased and March 31, 2018 fell under the financial institutions’ holiday in the Chemical Segment, despite the decrease due to the transfer to Assets held for sale. ・Advance payments to suppliers increased by ¥81.9 billion, mainly due to an increase in trading volume in the Machinery & Infrastructure Segment. ・Assets held for sale increased by ¥108.9 billion, because assets expected to be transferred from Mitsui and Mitsui & Co. Steel Ltd. to NIPPON STEEL & SUMIKIN BUSSAN CORPORATION are presented as a single line item as of March 31, 2018.
Non-current Assets: ・Investments accounted for using the equity method declined by ¥238.7 billion, mainly due to the following factors (Operating Segments are shown in parentheses):
48 - A decline of ¥250.8 billion corresponding to the incorporation of Valepar S.A. by Vale S.A. (Mineral & Metal Resources); - A decline of ¥73.6 billion resulting from foreign currency exchange fluctuations; - An increase of ¥234.9 billion corresponding to the profit of equity method investments for the current year, despite a decline of ¥285.9 billion due to dividends received from equity accounted investees; - An increase of ¥48.3 billion due to an additional acquisition of a stake in Penske Truck Leasing Co., L.P., which is engaged in truck leasing and rental business in North America (Machinery & Infrastructure); - An increase of ¥16.9 billion due to an investment in Cameron LNG Holdings, LLC, which is engaged in the natural gas liquefaction business in the U.S. (Energy); and - An increase of ¥15.1 billion due to an additional acquisition of a stake in International Columbia U.S. LLC, the holding company for Asia’s largest hospital group for middle-income patients (Lifestyle).
The following table shows the details of Investments accounted for using the equity method as of March 31, 2018 and 2017 by operating segment.
Billions of Yen As of March 31, Change 2018 2017 Iron & Steel Products 217.8 208.8 +9.0 Mineral & Metal Resources 431.7 711.0 (279.3) Machinery & Infrastructure 880.2 893.1 (12.9) Chemicals 117.4 111.7 +5.7 Energy 254.3 254.6 (0.3) Lifestyle 452.9 399.4 +53.5 Innovation & Corporate Development 151.4 163.6 (12.2) Total 2,505.6 2,742.2 (236.6) All Other and Adjustments and (2.6) (0.5) (2.1) Eliminations Consolidated Total 2,503.0 2,741.7 (238.7)
・Other investments increased by ¥487.8 billion, mainly due to the following factors: - An increase of ¥307.1 billion corresponding to the incorporation of Valepar S.A. by Vale S.A. (Mineral & Metal Resources); - Fair value on financial assets measured at FVTOCI increased by ¥159.5 billion mainly due to higher share prices; - An increase of ¥14.2 billion due to an investment in the Russian pharmaceutical company JSC R-Pharm (Lifestyle); and - An increase of ¥10.2 billion due to an additional acquisition of shares in NIPPON STEEL & SUMIKIN BUSSAN CORPORATION (Iron & Steel Products). ・Trade and other receivables (Non-Current) declined by ¥77.0 billion, mainly due to the following factors: - A decline of ¥28.0 billion due to collection of loan to the IPP business in Indonesia (Machinery & Infrastructure); - A decline of ¥19.4 billion due to collection of loan to SUMIC Nickel Netherlands, an investment company for overseas Nickel businesses (Mineral & Metal Resources); - A decline of ¥16.9 billion mainly due to reclassification of partial subsidiaries under Mitsui Rail Capital Participações Ltda., the holding company for freightcar leasing and management business in Brazil, to equity accounted investees (Machinery & Infrastructure); - A decline of ¥13.6 billion due to recording allowance for doubtful receivables against the loan to SCM Minera Lumina Copper Chile, the project company for the Caserones Copper Mine (Mineral & Metal Resources); - An increase of ¥19.3 billion due to execution of loan to Gestamp Automoción S.A’s North American operations (Iron & Steel Products); and - An increase of ¥13.4 billion due to execution of loan to the offshore energy business (Machinery & Infrastructure). ・Property, plant and equipment declined by ¥93.6 billion, mainly due to the following factors: - A decline of ¥34.0 billion at U.S. shale gas and oil producing operations mainly due to partial sale of interest in the Marcellus Shale Gas Project (including a foreign exchange translation loss of ¥8.1 billion) (Energy); - A decline of ¥30.5 billion (including a foreign exchange translation loss of ¥16.3 billion) at iron ore mining operations in Australia (Mineral & Metal Resources);
49 - A decline of ¥30.1 billion (including a foreign exchange translation loss of ¥15.3 billion) at oil and gas operations other than U.S. shale gas and oil producing operations (Energy); and - An increase of ¥10.5 billion for the integrated development project in the 2, Ohtemachi 1-Chome District (All Other).
The following table shows the details of property, plant and equipment as of March 31, 2018 and 2017 by operating segment.
Billions of Yen As of March 31, Change 2018 2017 Iron & Steel Products 10.9 9.5 +1.4 Mineral & Metal Resources 381.7 410.5 (28.8) Machinery & Infrastructure 199.4 201.0 (1.6) Chemicals 201.5 203.3 (1.8) Energy 628.4 690.6 (62.2) Lifestyle 170.0 169.5 +0.5 Innovation & Corporate Development 36.4 37.9 (1.5) Total 1,628.3 1,722.3 (94.0) All Other and Adjustments and 101.6 101.2 +0.4 Eliminations Consolidated Total 1,729.9 1,823.5 (93.6)
The following table shows the details for the categories of property, plant and equipment leased to others as of March 31, 2018 and 2017.
Billions of Yen As of March 31, 2018 2017 Real estate 87.6 84.7 Ships and aircraft 75.6 81.0 Rolling stock, equipment and others 62.5 63.7 Consolidated Total 225.7 229.4
・Investment property increased by ¥9.2 billion, mainly due to an increase of ¥13.8 billion for the integrated development project in the 2, Ohtemachi 1-Chome District (Lifestyle). ・Deferred tax assets declined by ¥43.1 billion, mainly due to a reduction in the corporate tax rate following the U.S. tax reform.
Liabilities Current Liabilities: ・Short-term debt declined by ¥103.0 billion, mainly due to repayment of debt. Meanwhile, the current portion of long-term debt increased by ¥94.3 billion, mainly due to reclassification to current maturities, despite repayment of debt. ・Trade and other payables increased by ¥60.6 billion, corresponding to the increase in trade and other receivables. Furthermore, advances from customers increased by ¥75.7 billion, corresponding to the increase in advance payments to suppliers. ・Liabilities directly associated with assets held for sale increased by ¥40.3 billion, because liabilities expected to be transferred from Mitsui and Mitsui & Co. Steel Ltd. to NIPPON STEEL & SUMIKIN BUSSAN CORPORATION are presented as a single line item as of March 31, 2018 (Iron & Steel Products).
Non-current Liabilities: ・Long-term debt, less the current portion, declined by ¥565.9 billion, mainly due to reclassification to current maturities, repayment of debt and reclassification of partial subsidiaries under Mitsui Rail Capital Participações Ltda., the holding company for freightcar leasing and management in Brazil, to equity accounted investees (Machinery & Infrastructure).
50 ・Provisions increased by ¥3.9 billion, mainly due to recording of a provision related to Multigrain business (Lifestyle), despite the decrease of the asset retirement obligation by ¥19.0 billion at oil and gas operations other than U.S. shale gas and oil producing operations (Energy). ・Deferred tax liabilities declined by ¥14.4 billion, mainly due to the reversal of deferred tax liability for the retained earnings of Valepar S.A. corresponding to the incorporation of Valepar S.A. by Vale S.A. (Mineral & Metal Resources), the reversal of deferred tax liability on undistributed profits corresponding to receipt of dividends from the equity accounted investees which are engaged in the IPP business (Machinery & Infrastructure), and a reduction in the corporate tax rate following the U.S. tax reform, despite the increase in financial assets measured at FVTOCI corresponding to higher share prices.
Total Equity Attributable to Owners of the Parent ・Capital surplus declined by ¥23.3 billion mainly due to the decrease corresponding to an additional acquisition of a stake in Japan Collahuasi Resources, the holding company for Compañía Minera Doña Inés de Collahuasi, which is a copper mining company in Chile (Mineral & Metal Resources). ・Retained earnings increased by ¥353.3 billion. ・Other components of equity declined by ¥37.4 billion, mainly due to the following factors: - Financial assets measured at FVTOCI increased by ¥102.8 billion, mainly due to higher share prices. - Foreign currency translation adjustments declined by ¥146.6 billion, mainly reflecting the appreciation of the Japanese yen against the U.S. dollar, the Australian dollar, and the Brazilian real. ・Treasury stock which is a subtraction item in shareholders’ equity increased by ¥50.0 billion, due to share buy-back. ・Non-controlling interests declined by ¥14.6 billion, mainly due to an additional acquisition of a stake in Japan Collahuasi Resources, the holding company for Compañía Minera Doña Inés de Collahuasi which is a copper mining company in Chile (Mineral & Metal Resources).
6) Cash Flows
(Billions of Yen) Current Year Previous Year Change Cash flows from operating activities 553.6 404.2 +149.4 Cash flows from investing activities (248.2) (353.3) +105.1 Free cash flow 305.4 50.9 +254.5 Cash flows from financing activities (652.3) (50.3) (602.0) Effect of exchange rate changes on cash and cash equivalents (25.5) 12.4 (37.9) etc. Change in cash and cash equivalents (372.4) 13.0 (385.4)
Cash Flows from Operating Activities
(Billions of Yen) Current Year Previous Year Change Cash flows from operating activities a 553.6 404.2 +149.4 Cash flows from change in working capital b (112.9) (90.6) (22.3) Core operating cash flow a-b 666.5 494.8 +171.7
・Net cash from an increase or a decrease in working capital, or changes in operating assets and liabilities for the current year was ¥112.9 billion of net cash outflow mainly due to the effects of Other - net. Core operating cash flow, cash flows from operating activities without the net cash flow from an increase or a decrease in working capital, for the current year amounted to ¥666.5 billion. - Net cash inflow from dividend income, including dividends received from equity accounted investees, for the current year totaled ¥376.4 billion, an increase of ¥181.7 billion from ¥194.7 billion for the previous year. - Depreciation and amortization for the current year was ¥192.6 billion, a decline of ¥0.7 billion from ¥193.3 billion for the previous year.
51 The following table shows core operating cash flow by operating segment.
(Billions of Yen) Current Year Previous Year Change Iron & Steel Products 14.2 8.6 +5.6 Mineral & Metal Resources 240.8 202.1 +38.7 Machinery & Infrastructure 158.8 74.4 +84.4 Chemicals 50.2 53.8 (3.6) Energy 175.3 134.1 +41.2 Lifestyle 7.1 8.4 (1.3) Innovation & Corporate Development 3.1 6.1 (3.0) All Other and Adjustments and Eliminations 17.0 7.3 +9.7 Consolidated Total 666.5 494.8 +171.7
Cash Flows from Investing Activities ・Net cash outflows that corresponded to investments in equity accounted investees (net of sales of investments in equity accounted investees) were ¥115.0 billion, mainly due to the following factors (Operating Segments are shown in parentheses): - An additional acquisition of a stake in Penske Truck Leasing Co., L.P., which is engaged in the truck leasing and rental business in North America, for ¥48.3 billion (Machinery & Infrastructure); - An investment in Cameron LNG Holdings, LLC, which is engaged in the natural gas liquefaction business in the U.S., for ¥16.9 billion (Energy); - An investment in CIM Group, LLC for ¥10.1 billion (Innovation & Corporate Development); - A sale of a stake in relation to the water concession business in Czech Republic (Machinery & Infrastructure); and - A partial sale of an equity accounted investment for ¥10.9 billion (Machinery & Infrastructure). ・Net cash outflows that corresponded to other investments (net of sales and maturities of other investments) were ¥23.5 billion, mainly due to the following factors: - An investment in the Russian pharmaceutical company JSC R-Pharm for ¥22.0 billion (Lifestyle); - An acquisition of a healthcare staffing project in the U.S. for ¥13.3 billion (Lifestyle); - An additional acquisition of shares in NIPPON STEEL & SUMIKIN BUSSAN CORPORATION for ¥10.2 billion (Iron & Steel Products); and - A sale of a stake in Champions Cinco Pipe & Supply LLC, oil and gas well tubular business (Iron & Steel Products). ・Net cash inflows that corresponded to collections of loan receivables (net of increases in loan receivables) were ¥25.7 billion, mainly due to the following factors: - Collection of loan to the IPP business in Indonesia for ¥28.0 billion (Machinery & Infrastructure); - Collection of loan to SUMIC Nickel Netherlands, an investment company for overseas Nickel businesses for ¥19.4 billion (Mineral & Metal Resources); - Collection of loan corresponding to the sales of the interest in UK First Hydro power assets for ¥18.4 billion (Machinery & Infrastructure); - Execution of loan to Gestamp Automoción S.A’s North American operations for ¥19.3 billion (Iron & Steel Products); and - Execution of loan to the offshore energy business for ¥13.4 billion (Machinery & Infrastructure). ・Net cash outflows that corresponded to purchases of property, plant, and equipment (net of sales of those assets) were ¥135.7 billion, mainly due to the following factors: - An expenditure for the oil and gas projects other than the U.S. shale gas and oil projects for a total of ¥64.1 billion (Energy); - An expenditure for iron ore mining operations in Australia for ¥15.0 billion (Mineral & Metal Resources); - An expenditure for coal mining operations in Australia for ¥13.9 billion (Mineral & Metal Resources); - An expenditure for the U.S. shale gas and oil projects for ¥11.5 billion (Energy); - An expenditure for the integrated development project in the 2, Ohtemachi 1-Chome District for ¥10.5 billion (All Other); and - A partial sale of interest in the Marcellus Shale Gas Project for ¥15.8 billion (Energy). ・Net cash outflows that corresponded to sales of investment property (net of purchases of investment property) were ¥8.1 billion, mainly due to the following factors: - An expenditure for the integrated development project in the 2, Ohtemachi 1-Chome District for ¥13.8 billion (Lifestyle); and - A sale of buildings in Japan by Mitsui & Co. Real Estate Ltd. for ¥10.5 billion (Lifestyle).
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The following table shows net cash provided by (used in) investing activities by operating segment.
Billions of Yen
Current Year Previous Year Iron & Steel Products (22.5) (40.7) Mineral & Metal Resources (2.4) (72.0) Machinery & Infrastructure (38.1) (70.0) Chemicals (35.4) (1.3) Energy (57.2) (43.7) Lifestyle (69.1) (57.8) Innovation & Corporate Development (3.3) (39.0) Total (228.0) (324.5) All Other and Adjustments and Eliminations (20.2) (28.8) Consolidated Total (248.2) (353.3)
Cash Flows from Financing Activities ・Net cash outflows from net change in short-term debt and long-term debt were ¥99.0 billion and ¥351.2 billion, respectively, mainly due to the repayment of debt. ・The cash outflow from the purchases of treasury stock was ¥50.0 billion. ・The cash outflow from payments of cash dividends was ¥105.8 billion. ・The cash outflow from transactions with non-controlling interest shareholders was ¥46.2 billion, mainly due to an additional acquisition of a stake in Japan Collahuasi Resources, the holding company for Compañía Minera Doña Inés de Collahuasi, which is a copper mining company in Chile (Mineral & Metal Resources).
See “2) Funding Sources” for funding during the year ended March 31, 2018.
(6) Critical Accounting Policies and Estimates
Accounting policies and estimates are considered to be critical if they are important to our financial condition and results of operations and involve estimates that require management’s subjective or significant judgment about the effect of matters that are inherently uncertain.
The preparation of the consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the carrying values of assets and liabilities and the disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
The following items require significant management judgments and estimates.
Impairment losses and reversal of impairment losses of Non-financial Assets and Investments in Equity Accounted Investee
Impairment losses of tangible fixed assets and intangible assets other than goodwill and intangible assets with infinite estimated useful lives, for the years ended March 31, 2018 and 2017, were ¥20.5 billion and ¥5.2 billion, respectively. Reversal of impairment losses of the assets for the year ended March 31, 2018 were ¥1.4 billion. On the other hand, there were no reversal of impairment losses of the assets for the year ended March 31, 2017. The carrying amounts of these assets, net of accumulated depreciation and impairment losses, as of March 31, 2018 and 2017, were ¥2,011.9 billion and ¥2,099.1 billion, respectively.
The amount of impairment losses of investments in equity accounted investees for the years ended March 31, 2018 and 2017, were ¥14.4 billion and ¥0.6 billion, respectively. The amount of reversal of impairment losses of the assets for the year ended March 31, 2018 were ¥1.0 billion. On the other hand, there were no reversal of impairment losses of the assets for the year ended March 31, 2017. The carrying amounts of investments in equity accounted investees as of March 31, 2018 and 2017, were ¥2,503.0 billion and ¥2,741.7 billion, respectively.
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Impairment losses and reversal of impairment losses of non-financial assets and investments in equity accounted investees may have a material impact on our profit for the year.
Impairment losses were mainly due to the declining profitability resulting from deterioration of business environment and the reorganization of business structure of our consolidated subsidiaries and the fall in the market value of investments in equity accounted investees.
Non-financial assets and investments in equity accounted investees are assessed to determine whether there is any indication of impairment. If any such indication exists, the recoverable amounts of the non-financial assets or asset groups and the investment are estimated. Where the carrying amount exceeds its recoverable amount, the difference is recognized as impairment loss.
The recoverable amount is the higher of fair value less costs of disposal and value in use.
Fair value is assessed as the price in an orderly transaction between market participants, such as the market price of marketable investments in equity accounted investees and the price on the appraisal report by the independent third party.
Cash flow projections used in calculations of value in use are based on the business plan authorized by our management or, if this is not available, on the operating plan reflecting the most recent condition of the non-financial asset. In these plans, for example, we assume:
- that the level of most recent selling prices and rents of real estate in the surrounding areas will remain unchanged for a reasonable period in the future;
- that the estimate of the sales prices of the products from facilities and equipment for the certain future period is based on the average price of the equivalent length of period in the past or on the analysts' reports;
- that for the development equipment and mining rights involved in resource businesses such as coal and oil, the most updated reserve will be produced in accordance with a production plan by using the non-financial assets, and that such materials to be produced will be sold on the assumption of prices based on futures prices as of the time of the review for impairment, prices estimated by third parties, or sales prices under long-term sales contracts; and
- that the estimate of the revenues from an operation derived from customer relationship for the certain future period is based on the degree of contribution to revenues in the past, on the past ratio of cancellation of contracts, and on analysts’ market forecasts.
A profit margin which is deemed to be the market average and the risks inherent in the cash-generating unit is used as discount rate to calculate value in use.
Factors to be considered when estimating future cash flows and determining discount rates vary for each non-financial asset because of the difference in nature of the assets and in operating circumstances, such as location, owner, operator, profitability and other factors.
An assessment is made at each reporting date as to whether there is any indication of impairment that previously recognized impairment losses may no longer exist or may have decreased. A previously recognized impairment loss is reversed as income in consolidated statements of income only if there has been a change in the assumptions used to determine the recoverable amount of the asset since the last impairment loss was recognized.
Impairment of Goodwill
Impairment losses on goodwill for the year ended March 31, 2018 and 2017 were ¥6.4 billion and ¥0.1 billion, respectively. The carrying amounts as of March 31, 2018 and 2017 were ¥75.8 billion and ¥68.5 billion, respectively.
54 Goodwill is allocated to each of the cash-generating units or groups of cash-generating units that are expected to benefit from the synergies arising from the combination, and it is tested for impairment annually regardless of any indication of impairment, and when there is an indication that the cash-generating unit may be impaired.
Impairment testing is performed by comparing the carrying amount of the cash-generating unit or groups of cash-generating units, including the goodwill, with the recoverable amount. If the carrying amount exceeds the recoverable amount, the excess amount is recognized as the impairment loss. The recoverable amount is estimated by the same method as impairment testing of non-financial assets.
Non-marketable equity financial assets measured at fair value
Non-marketable equity securities measured at fair value are generally elected to be designated as FVTOCI. The carrying amounts of non-marketable securities which are the fair value as of the year ended March 31, 2018 and 2017 were ¥638.9 billion and ¥646.0 billion, respectively. The company performs internal valuation analyses using the discounted cash flow method or by utilizing external valuation performed by independent external experts when management believes the amounts are material. Similar to impairment of non-financial assets and investments in equity accounted investee, cash flow projections used in the fair value calculations are based on business plans authorized by investee’s management. Estimates and assumptions for fair value calculations could significantly impact other comprehensive income.
Tax Asset Valuation
Decrease in deferred tax assets due to the changes in assessment for their recoverability has had a significant impact on our profit and other comprehensive income for the year.
Our management determines the recoverability of deferred tax assets based on all available evidence including tax deductibility on future years and forecast of future taxable incomes of Mitsui and its subsidiaries. Deferred tax assets are recognized to the extent that they are recoverable, and the amount of recoverable deferred tax assets may fluctuate due to the change in estimates of future taxable incomes or statutory tax rates.
Reserve estimates for oil and gas producing and mining activities
Reserves are estimates of the amount of product that can be economically and legally extracted from interests in our properties. In order to calculate reserves, estimates and assumptions are required about a range of geological, technical and economic factors, including quantities, grades, production techniques, recovery rates, production costs, transport costs, commodity demand, commodity prices and exchange rates. Because the economic assumptions used to estimate reserves change from period to period, and because additional geological data is generated during the course of operations, estimates of reserves may change from period to period. Changes in reported reserves may affect our financial results and financial position in a number of ways, including the following:
- Asset carrying values may be impaired due to changes in estimated future cash flows.
- Depreciation and amortization charged in the income statement may change where such charges are determined by the units of production basis, or where the useful economic lives of assets change.
- Decommissioning, site restoration and environmental provisions may change where changes in estimated reserves affect expectations about the timing or cost of these activities.
Defined benefit costs and obligations
Employee defined benefit costs and obligations are dependent on various assumptions, including discount, retirement, and mortality rates, which are based on current statistical data, and other factors. In accordance with IFRS, the difference between actual results and the assumptions is recognized immediately in other components of equity in equity and are transferred to retained earnings on recognition, and, therefore, generally affects comprehensive income and retained earnings. Management believes that the assumptions used are appropriate; however, differences in actual experience or changes in assumptions may affect our future defined benefit costs and obligations. 55
We determine the discount rates each year as of the measurement date, based on a review of interest rates associated with high-quality fixed-income corporate bonds or long-term Japanese government bonds. The discount rates determined on each measurement date are used to calculate the defined benefit obligations as of that date, and are also used to calculate the net periodic pension costs for the upcoming plan year.
See Note 19, “EMPLOYEE BENEFITS,” for further discussion about the estimates and assumptions on the defined benefit costs and obligations.
4. Material Contracts
There are no contracts for which disclosure is required.
5. Research & Development
There are no R&D activity for which disclosure is required.
56 3. Equipment and Facilities
1. Overview of Capital Expenditures
For a breakdown of the amounts of capital expenditures for property and equipment in the year ended March 31, 2018, see “3. Management’s Discussion and Analysis of Financial Position, Operating Results and Cash Flows, (5) Liquidity and Capital Resources, 5) Assets, Liabilities and Shareholders’ Equity and 6) Cash Flows.” Also see Note 7, “SEGMENT INFORMATION.”
Expenditures for property, plant, equipment and investment property for the year ended March, 31, 2018 mainly included expenditures for the oil and gas projects of ¥75.6 billion in the Energy Segment, expenditures for the integrated development project in 2, Ohtemachi 1-Chome District for ¥24.3 billion in the Lifestyle Segment and the All Other Segment, and expenditures for the iron ore mining operations in Australia of ¥15.0 billion and for the coal mining operations in Australia of ¥13.9 billion in the Mineral & Metal Resources Segment.
2. Major Equipment and Facilities
(1) Mitsui & Co., Ltd.
Land, Land Equipment Improvements and Buildings and Number of Timberlands Fixtures Other Operating Type of Equipment Use of Office Name Location Employees (Millions Segment and Facilities Carrying Carrying Carrying Property (Persons) Acreage Amount Amount Amount of Yen) (㎡) (Millions (Millions (Millions of Yen) of Yen) of Yen) Chiyoda-ku, Rent:¥6,697 Head Office Office building 3,500 - - 3,012 - 92 Tokyo mil/year Including Multi-purpose office Chiyoda-ku, - 14,105 57,012 - - 48,796 investment complex Tokyo property Kita-ku, Partially Kansai Office Office building Osaka-shi, 108 3,038 2,161 6,421 - 2 leased Osaka Other Nakamura-ku, Partially Chubu Office Office building Nagoya-shi, 51 1,525 548 835 - - leased Aichi Human Resource Atami-shi, - 15,655 2,045 922 - 3 Development Center Shizuoka Global Human Tsuzuki-ku, Resource Yokohama- - 15,000 2,417 930 - 6 Development Center shi, Kanagawa
57 (2) Domestic Subsidiaries
Land, Land Equipment Improvements and Buildings and Office Name Number of Timberlands Fixtures Other Operating and Type of Use of Company Name Location Employees (Millions Segment Equipment and Carrying Carrying Carrying Property (Persons) of Yen) Facilities Acreage Amount Amount Amount (㎡) (Millions (Millions (Millions of Yen) of Yen) of Yen) Kita Kanto Branch, MITSUI Iron & Steel Mitsui & Co. BUSSAN Ota-shi, Gunma 694 59,657 2,561 1,116 1,970 61 Products Steel Ltd. KOZAI and others HANBAI CO., LTD. and others DAIICHI Chuo-ku, TANKER CO., Ships 80 - - 5 13 7,030 Tokyo LTD. Chemicals San-ei Main Factory / Chita-shi, Aichi Sucrochemical Second Factory 225 103,449 2,126 2,253 2,835 99 and others Co., Ltd. and others Crude oil / gas Mitsui Oil Thailand, Gulf Including manufacturing Energy Exploration of Thailand and 154 - - 2,900 88,469 74,703 mineral facility and Co., Ltd. others rights others Tokyo MITSUI Metropolitan Midori-ku, Including FOODS CO., West Sagamihara-shi, 1,200 28,146 11,524 10,338 3,618 3,477 investment LTD. Distribution Kanagawa property Center Misawa-shi, PRIFOODS Hosoya Factory Aomori and 1,635 110,975 3,422 8,455 7,869 122 CO., LTD. and others others
Mitsui Norin Fujieda-shi, Fujieda Plant 441 21,719 1,488 3,730 1,522 43 Co., Ltd. Shizuoka Lifestyle CB Nagoya Bussan Minato-ku, Center / Logistics Nagoya-shi, Fukushima 638 9,550 564 6,199 1,524 - Solutions Co., Aichi and Sales Office Ltd. others and others MITSUI & CO. Hibiya Central Including Minato-ku, REAL Building and 42 - - 35 19 37,733 investment Tokyo ESTATE LTD. others property
MicroBiopharm Yatsushiro Yatsushiro-shi, 211 74,753 1,927 2,565 2,761 828 Japan Co., Ltd. Factory Kumamoto
Innovation & Mitsui & Co. Higashihama Including Ichikawa-shi, Corporate Global Logistic Center 515 60,364 15,724 10,468 1,082 2,963 investment Chiba Development Logistics, Ltd.. and others property (Note) For those companies who own more than one type of equipment or facility, only the information of the most notable one is presented. For the number of employees and the carrying amount, the total number and amount in each company are presented. For movables such as ships and aircraft, the location of each company’s head office is presented.
58 (3) Overseas Subsidiaries
Land, Land Equipment Improvements and Buildings and Office Name Number of Timberlands Fixtures Other Operating and Type of Use of Company Name Location Employees (Millions Segment Equipment and Carrying Carrying Carrying Property (Persons) of Yen) Facilities Acreage Amount Amount Amount (㎡) (Millions (Millions (Millions of Yen) of Yen) of Yen) Mitsui Iron Pilbara, Mining Ore Western equipment for 8 - - 97,899 58,549 2,103 Development Australia, iron ore Pty. Ltd. Australia Mitsui Iron Pilbara, Mining Including Ore Western equipment for 7 - - 7,588 30,594 5,129 mineral Corporation Australia, Mineral & iron ore rights Pty. Ltd. Australia Metal Pilbara, Resources Mining Mitsui-Itochu Western equipment for - - - 23,454 86,021 7,939 Iron Pty. Ltd. Australia, iron ore Australia Emerald, Mitsui Coal Mining Including Queensland, Holdings Pty. equipment for 15 - - 4,596 43,113 13,559 mineral Australia and Ltd. coal rights others Including Mitsui Rail Amsterdam, property Capital Europe Rolling stock 117 - - - 57,772 11,014 Netherlands leased to B.V. others Ecogen Brasil Soluções Equipment for Sao Paulo, 250 - - - 11,125 122 Energéticas energy services Brazil S.A. Portek Port terminal Singapore and International facility and 1,201 - 8 2,793 6,350 - others Pte. Limited. others Komatsu- Including Mitsui Construction property Machinery & Callao, Peru 1,936 38,000 2,864 3,073 4,179 503 Maquinarias equipment leased to Infrastructure Peru S.A. others M&T Aviation Including Finance Dublin, property Aircraft - - - - - 29,896 (Ireland) Ireland leased to Limited others Including OMC property SHIPPING Ships Singapore 16 - - 19 8 44,035 leased to PTE. LTD. others Including Mitsui property Automotriz Automobiles Lima, Peru 560 28,104 895 2,566 1,668 68 leased to S.A. others Shark Bay, Salt Western Shark Bay Salt manufacturing Australia, 141 - 558 17,378 7,410 580 Pty. Ltd. facility Australia and Chemicals others Methanol Houston, MMTX Inc. production 2 - - 1,285 36,232 168 Texas, U.S.A. facility
59
Land, Land Equipment Improvements and Buildings and Office Name Number of Timberlands Fixtures Other Operating and Type of Use of Company Name Location Employees (Millions Segment Equipment and Carrying Carrying Carrying Property (Persons) of Yen) Facilities Acreage Amount Amount Amount (㎡) (Millions (Millions (Millions of Yen) of Yen) of Yen) Inter- Including continental Chemical tank Deer Park, property 302 1,067,953 3,448 72,801 255 7,584 Terminals terminal Texas, U.S.A. leased to Chemicals Company LLC others Novus Feed additive Alvin, Texas, International, manufacturing U.S.A. and 916 - 686 2,446 9,958 4,567 Inc. plant others Crude oil / gas Mitsui E&P Indian Ocean, Including manufacturing Australia Pty Australia 17 - - - 20,117 78,228 mineral facility and Limited and others rights others Crude oil / gas Mitsui E&P Including manufacturing Oman and Middle East 21 - - 23 21,054 2,166 mineral facility and others B.V. rights others Gas Including Mitsui E&P Pennsylvania, manufacturing 30 - - - 76,841 11,901 mineral USA LLC U.S.A. plant and others rights Energy Crude oil / gas Including MEP Texas manufacturing Texas, U.S.A. - - - - 50,002 2,445 mineral Holdings LLC facility and rights others Mitsui E&P Crude oil / gas Northern Mozambique exploration offshore, 2 - - - 1 33,796 Area 1 facility and Mozambique Limited others Crude oil / gas Including Mitsui E&P manufacturing Basilicata, 5 - - - 6 158,993 mineral Italia A S.r.l. facility and Italy rights others 970,740 Including Xingu Agri Tabuleiro farm Bahia, Brazil 523 (thousand 34,541 4,952 3,853 21,707 investment AG ㎡) property Tucson, Senior living and Including MBK Real Arizona, Lifestyle multi-family 1,534 - 1,983 17,093 235 16,494 investment Estate LLC U.S.A. and properties property others United Grain Vancouver, Grain exporting Corporation of Washington, 91 3,831,079 398 12,649 5,337 555 facility Oregon U.S.A. (Note) For those companies who own more than one type of equipment or facility, only the information of the most notable one is presented. For the number of employees and the carrying amount, the total number and amount in each company are presented. For movables such as ships and aircraft, the location of each company’s head office is presented.
3. Plans for New Additions or Disposals
As indicated in “1. Overview of Capital Expenditures,” major capital expenditures include mineral resources and energy resources areas and the integrated development project in Ohtemachi, and those areas are focused in the future.
60 4. Corporate Information
1. Status on the Mitsui’s Shares
(1) Total Number of Shares and Other Related Information
1) Total Number of Shares
Class Total number of shares authorized to be issued Common stock 2,500,000,000 Total 2,500,000,000
2) Number of Shares Issued
Number of shares Number of shares Names of stock exchanges on which outstanding as of Class outstanding Mitsui is listed or names of authorized Description issuance date of this (as of March 31, 2018) financial instruments firms association report (June 21, 2018)
Securities Exchanges in Tokyo, The number of Common stock 1,796,514,127 1,742,345,627 Nagoya, (both listed on the first shares constituting section), Sapporo, Fukuoka a unit is 100. Total 1,796,514,127 1,742,345,627 － －
61
(2) Status of the Share Subscription Rights
1) Stock Option Plans Share Subscription Rights issued based on the Companies Act of Japan are as follows:
i) Stock Option based on the resolution of the Board of Directors on July 4, 2014 (Stock option scheme as stock-based compensation with stock price conditions)
As of March 31, 2018 As of May 31, 2018 Date of resolution July 4, 2014 9 Directors (excluding External Directors) Class and number of person for subscription 24 Executive Officers who are not serving concurrently as Mitsui's Directors rights to shares (excluding Executive Officers residing outside Japan) Number of subscription rights to shares 1,907 1,835 Class of shares to be issued upon exercise of Common stock Same as on the left subscription rights to shares The number of shares constituting a unit is 100. Number of shares to be issued upon exercise of 190,700 (Note 1) 183,500 (Note 1) subscription rights to shares Amount to be paid in upon exercise of ¥1 Same as on the left subscription rights to shares (Exercise price) Exercise period of subscription rights to shares From July 28, 2017 to July 27, 2044 Same as on the left Price of issuing shares and amount of Price of issuing shares: ¥1 Same as on the left capitalization upon exercise of subscription Amount of capitalization shall be one half of the rights to shares upper limit of an increase in capital stock, etc., to be increased calculated in accordance with the Corporate Accounting Regulations of Japan, and a fraction of less than ¥1 arising as a result of the calculation shall be rounded up to the nearest ¥1. Conditions for exercise of subscription rights (Notes 2, 3) Same as on the left to shares Matters regarding acquisition of subscription Acquisition of subscription rights to shares Same as on the left rights to shares through transfer through transfer shall be subject to approval by resolution of the Board of Directors Matters regarding the grant of subscription (Note 4) Same as on the left rights to shares upon organizational restructuring (Notes) 1. The class of shares to be issued upon exercise of subscription rights to shares shall be common shares of Mitsui, and the number of shares to be issued upon exercise of one subscription right to shares (hereinafter referred to as the “number of shares granted”) will be 100 shares. After the day of allotment, however, if Mitsui undertakes a share split (including gratis allotment of common shares of Mitsui. The same shall apply to the description of the share split hereinafter.), or a share consolidation with respect to common shares of Mitsui, an adjustment to the number of shares granted will be made according to the following formula, and any fractional portion of less than one share resulting from the foregoing adjustment shall be disregarded:
Number of shares granted after adjustment = Number of shares granted before adjustment × Ratio of share split or share consolidation
2. Exercise of right by an heir In the case that inheritance from a holder of subscription rights to shares commenced for reasons such as the death of the holder, only one of the heirs-at-law of the holder of subscription rights to shares (hereinafter referred to as the
62 “heir-at-law”) may exercise the offered subscription rights to shares. It is not permitted to inherit subscription rights to shares again in the case that the heir-at-law dies.
3. Conditions for exercise of subscription rights to shares (1) A holder of subscription rights to shares may no longer exercise the subscription rights to shares after a period of 10 years has elapsed from the day following the day on which the holder of subscription rights to shares loses his/her position as Director, and/or Executive Officer, and/or Audit & Supervisory Board Member of Mitsui. (2) A holder of subscription rights to shares may exercise all of the subscription rights to shares only when, as the stock price conditions, Mitsui’s stock price growth rate for the period of three years from the allotment date is equal to or exceeds the TOPIX (Tokyo Stock Price Index) growth rate. When Mitsui’s stock price growth rate does not exceed the TOPIX growth rate, reflecting that degree, the holder of subscription rights to shares may exercise only part of such subscription rights to shares allotted (please refer to the below for details). (3) Notwithstanding the exercise period of subscription rights to shares prescribed above, if a proposal for approval of a merger agreement under which Mitsui is to be dissolved, or a proposal for approval of a share exchange agreement or a share transfer plan, under which Mitsui will become a wholly-owned subsidiary is approved at an ordinary general meeting of shareholders of Mitsui, holders of subscription rights to shares may exercise offered subscription rights to shares within 15 days from the following day of the day on which such proposal for approval is approved, except where subscription rights to shares of a restructured company are to be issued to the holders of subscription rights to shares in accordance with Note 4 below. (4) In the event that Mitsui recognizes any violation of laws and regulations, misconduct of the duties, act conflicting with the duty of due care or duty of loyalty, or any other act equivalent thereto of a holder of subscription rights to shares during the period in which he/she serves as Mitsui’s Director, and/or Executive Officer, and/or Audit & Supervisory Board Member, Mitsui may limit, subject to a resolution by the Board of Directors of Mitsui, the number of subscription rights to shares that may be exercised by such holder of subscription rights to shares. In this event, such holder of subscription rights to shares may not exercise the subscription rights to shares more than the said limit.
4. If Mitsui is to engage in a merger (limited to cases where Mitsui is to be dissolved as a result of the merger), an absorption-type company split or an incorporation-type company split (both limited to cases where Mitsui is to be a split company), or a share exchange or a share transfer (both limited to cases where Mitsui is to be a wholly-owned subsidiary) (all of which are collectively referred to as a “restructuring transaction”), subscription rights to shares in the entity specified under Article 236, Paragraph 1, Item 8 (a) through (e) of the Companies Act of Japan (such entity hereinafter referred to as the “restructured company”) shall be issued, in accordance with the following conditions, to holders of subscription rights to shares who hold subscription rights to shares remaining in effect immediately prior to the effective date of the restructuring transaction (hereinafter respectively referring to the effective date of an absorption-type merger in case of an absorption-type merger, the date of formation of a new company incorporated by the merger in case of a consolidation-type merger, the effective date of an absorption-type company split in case of an absorption-type company split, the date of formation of a new company in case of an incorporation-type company split, the effective date of a share exchange in the case of a share exchange, and the date of formation of a wholly-owning parent company in case of a share transfer) (such rights hereinafter referred to as “remaining subscription rights to shares”). In this event, the remaining subscription rights to shares shall become extinct, and the restructured company shall newly issue subscription rights to shares. However, such rights may be granted only if provisions for issuing the subscription rights to shares of the restructured company in accordance with the following conditions are included in an absorption-merger agreement, a consolidation-type merger agreement, an absorption- type company split agreement, an incorporation-type company split plan, a share exchange agreement, or a share transfer plan. (1) The number of subscription rights to shares of the restructured company to be issued The same number of subscription rights to shares as the number of remaining subscription rights to shares owned by respective holders of subscription rights to shares shall be issued. (2) The class of shares of the restructured company to be issued upon exercise of the subscription rights to shares The class of shares of the restructured company to be issued upon exercise of the subscription rights to shares shall be common shares of the restructured company. (3) The number of shares of the restructured company to be issued upon exercise of subscription rights to shares
63 The number of shares of the restructured company to be issued upon exercise of subscription rights to shares shall be determined in accordance with the provisions in Note 1 above, taking into consideration the conditions and other factors concerning the restructuring transactions. (4) The amount of assets to be contributed upon exercise of subscription rights to shares The amount of assets to be contributed upon exercise of each subscription right to shares to be issued shall be the amount obtained by multiplying the amount to be paid in after restructuring as prescribed below by the number of shares of the restructured company to be issued upon exercise of each subscription right to shares that will be determined in accordance with (3) above. The amount to be paid in after restructuring shall be ¥1 per share of the restructured company to be issued upon exercise of each subscription right to shares to be issued. (5) Exercise period of subscription rights to shares The exercise period of subscription rights to shares shall begin on the date of commencement of the exercise period or the effective date of the restructuring transaction, whichever is later, and end on the closing date of the exercise of such subscription rights to shares. (6) Matters concerning capital stock and capital reserve to be increased in the event of issuance of shares upon exercise of subscription rights to shares It shall be determined in accordance with the memorandum for offering. (7) Restriction on acquisition of subscription rights to shares through transfer Acquisition of subscription rights to shares through transfer requires the approval of the restructured company. (8) Terms and conditions of acquisition of subscription rights to shares It shall be determined in accordance with the memorandum for offering. (9) Other conditions for exercise of subscription rights to shares It shall be determined in accordance with the memorandum for offering.
Details of stock price conditions 1. When Mitsui’s stock price growth rate*1 is equal to or exceeds the TOPIX (Tokyo Stock Price Index) growth rate*2: All of the subscription rights to shares granted may be exercised.
2. When Mitsui’s stock price growth rate does not exceed the TOPIX growth rate: Only part of the subscription rights to shares granted*3 may be exercised.
*1 Mitsui’s stock price growth rate shall be calculated by the formula below based on Mitsui’s stock price growth rate for the period of three years from the allotment date to the first date of the exercise period. A: The average closing price for Mitsui’s common stock on the Tokyo Stock Exchange on each day for the three months immediately before the month in which the first date of the exercise period of the subscription rights to shares falls B: The total amount of dividends per common share of Mitsui for the period from the allotment date to the first date of the exercise period of the subscription rights to shares C: The average closing price for Mitsui’s common stock on the Tokyo Stock Exchange on each day for the three months immediately before the month in which the allotment date falls Mitsui’s stock price growth rate = (A + B) / C
*2 The TOPIX growth rate shall be calculated by the formula below based on the TOPIX growth rate for the period of three years from the allotment date to the first date of the exercise period. D: The average closing price for TOPIX on the Tokyo Stock Exchange on each day for the three months immediately before the month in which the first date of the exercise period of the subscription rights to shares falls E: The average closing price for TOPIX on the Tokyo Stock Exchange on each day for the three months immediately before the month in which the allotment date falls TOPIX growth rate = D / E
*3 Number of exercisable subscription rights to shares = Number of subscription rights to shares granted × (Mitsui’s stock price growth rate / TOPIX growth rate)
64
ii) Stock Option based on the resolution of the Board of Directors on May 8, 2015 (Stock option scheme as stock-based compensation with stock price conditions)
As of March 31, 2018 As of May 31, 2018 Date of resolution May 8, 2015 Class and number of person for subscription 1 Executive Officer who is not serving concurrently as a Mitsui's Director rights to shares Number of subscription rights to share 68 68 Class of shares to be issued upon exercise of Common stock Same as on the left subscription rights to shares The number of shares constituting a unit is 100. Number of shares to be issued upon exercise of 6,800 (Note 1) 6,800 (Note 1) subscription rights to shares Amount to be paid in upon exercise of ¥1 Same as on the left subscription rights to shares (Exercise price) Exercise period of subscription rights to shares From May 28, 2018 to May 27, 2045 Same as on the left Price of issuing shares and amount of Price of issuing shares: ¥1 Same as on the left capitalization upon exercise of subscription Amount of capitalization shall be one half of the rights to shares upper limit of an increase in capital stock, etc., to be increased calculated in accordance with the Corporate Accounting Regulations of Japan, and a fraction of less than ¥1 arising as a result of the calculation shall be rounded up to the nearest ¥1. Conditions for the exercise of subscription (Notes 2, 3) Same as on the left rights to shares Matters regarding acquisition of subscription Acquisition of subscription rights to shares Same as on the left rights to shares through transfer through transfer shall be subject to approval by resolution of the Board of Directors Matters regarding the grant of subscription (Note 4) Same as on the left rights to shares upon organizational restructuring (Note) Notes 1. to 4. are the same as Notes 1. to 4 in i) Stock Option based on the resolution of the Board of Directors on July 4, 2014 (stock option scheme as stock-based compensation with stock price conditions).
65 iii) Stock Option based on the resolution of the Board of Directors on July 8, 2015 (Stock option scheme as stock-based compensation with stock price conditions)
As of March 31, 2018 As of May 31, 2018 Date of resolution July 8, 2015 9 Directors (excluding External Directors) Class and number of person for subscription 24 Executive Officers who are not serving concurrently as Mitsui's Directors rights to shares (excluding Executive Officers residing outside Japan) Number of subscription rights to share 2,507 2,507 Class of shares to be issued upon exercise of Common stock Same as on the left subscription rights to shares The number of shares constituting a unit is 100. Number of shares to be issued upon exercise of 250,700 (Note 1) 250,700 (Note 1) subscription rights to shares Amount to be paid in upon exercise of ¥1 Same as on the left subscription rights to shares (Exercise price) Exercise period of subscription rights to shares From July 28, 2018 to July 27, 2045 Same as on the left Price of issuing shares and amount of Price of issuing shares: ¥1 Same as on the left capitalization upon exercise of subscription Amount of capitalization shall be one half of the rights to shares upper limit of an increase in capital stock, etc., to be increased calculated in accordance with the Corporate Accounting Regulations of Japan, and a fraction of less than ¥1 arising as a result of the calculation shall be rounded up to the nearest ¥1. Conditions for the exercise of subscription (Notes 2, 3) Same as on the left rights to shares Matters regarding acquisition of subscription Acquisition of subscription rights to shares Same as on the left rights to shares through transfer through transfer shall be subject to approval by resolution of the Board of Directors Matters regarding the grant of subscription (Note 4) Same as on the left rights to shares upon organizational restructuring (Note) Notes 1. to 4. are the same as Notes 1. to 4 in i) Stock Option based on the resolution of the Board of Directors on July 4, 2014 (stock option scheme as stock-based compensation with stock price conditions).
66 iv) Stock Option based on the resolution of the Board of Directors on July 13, 2016 (Stock option scheme as stock-based compensation with stock price conditions)
As of March 31, 2018 As of May 31, 2018 Date of resolution July 13, 2016 9 Directors (excluding External Directors) 28 Executive Officers who are not serving concurrently as Mitsui's Directors Class and number of person for subscription (excluding Executive Officers residing outside Japan, including retired rights to shares Executive Officers to whom granting Stock options were withheld during their assignment outside Japan) Number of subscription rights to share 3,627 3,627 Class of shares to be issued upon exercise of Common stock Same as on the left subscription rights to shares The number of shares constituting a unit is 100. Number of shares to be issued upon exercise of 362,700 (Note 1) 362,700 (Note 1) subscription rights to shares Amount to be paid in upon exercise of ¥1 Same as on the left subscription rights to shares (Exercise price) Exercise period of subscription rights to shares From July 29, 2019 to July 28, 2046 Same as on the left Price of issuing shares and amount of Price of issuing shares: ¥1 Same as on the left capitalization upon exercise of subscription Amount of capitalization shall be one half of the rights to shares upper limit of an increase in capital stock, etc., to be increased calculated in accordance with the Corporate Accounting Regulations of Japan, and a fraction of less than ¥1 arising as a result of the calculation shall be rounded up to the nearest ¥1. Conditions for the exercise of subscription (Notes 2, 3) Same as on the left rights to shares Matters regarding acquisition of subscription Acquisition of subscription rights to shares Same as on the left rights to shares through transfer through transfer shall be subject to approval by resolution of the Board of Directors Matters regarding the grant of subscription (Note 4) Same as on the left rights to shares upon organizational restructuring (Note) Notes 1. to 4. are the same as Notes 1. to 4 in i) Stock Option based on the resolution of the Board of Directors on July 4, 2014 (stock option scheme as stock-based compensation with stock price conditions).
67 v) Stock Option based on the resolution of the Board of Directors on July 5, 2017 (Stock option scheme as stock-based compensation with stock price conditions)
As of March 31, 2018 As of May 31, 2018 Date of resolution July 5, 2017 9 Directors (excluding External Directors) 29 Executive Officers who are not serving concurrently as Mitsui's Directors Class and number of person for subscription (excluding Executive Officers residing outside Japan, including retired rights to shares Executive Officers to whom granting Stock options were withheld during their assignment outside Japan) Number of subscription rights to share 3,252 3,252 Class of shares to be issued upon exercise of Common stock Same as on the left subscription rights to shares The number of shares constituting a unit is 100. Number of shares to be issued upon exercise of 325,200 (Note 1) 325,200 (Note 1) subscription rights to shares Amount to be paid in upon exercise of ¥1 Same as on the left subscription rights to shares (Exercise price) Exercise period of subscription rights to shares From July 20, 2020 to July 19, 2047 Same as on the left Price of issuing shares and amount of Price of issuing shares: ¥1 Same as on the left capitalization upon exercise of subscription Amount of capitalization shall be one half of the rights to shares upper limit of an increase in capital stock, etc., to be increased calculated in accordance with the Corporate Accounting Regulations of Japan, and a fraction of less than ¥1 arising as a result of the calculation shall be rounded up to the nearest ¥1. Conditions for the exercise of subscription (Notes 2, 3) Same as on the left rights to shares Matters regarding acquisition of subscription Acquisition of subscription rights to shares Same as on the left rights to shares through transfer through transfer shall be subject to approval by resolution of the Board of Directors Matters regarding the grant of subscription (Note 4) Same as on the left rights to shares upon organizational restructuring (Note) Notes 1. to 4. are the same as Notes 1. to 4 in i) Stock Option based on the resolution of the Board of Directors on July 4, 2014 (stock option scheme as stock-based compensation with stock price conditions).
68 2) Right Plans
Not applicable.
3) Other Information about Share Subscription Rights
Not applicable.
(3) Exercise Status of Bonds with Share Subscription Rights Containing a Clause for Exercise Price Adjustment
Not applicable.
(4) Trends in the Number of Shares Issued, Amount of Common Stock, and Others
Changes in the Balance of the Changes in Balance of Changes in Balance of number of shares number of shares additional paid-in additional paid-in Period common stock common stock issued issued capital capital (Millions of Yen) (Millions of Yen) (Thousands) (Thousands) (Millions of Yen) (Millions of Yen) From April 1, 2013 to － 1,829,153 － 341,481 － 367,758 March 31, 2014 From April 1, 2014 to March 31, 2015 (Note (32,639) 1,796,514 － 341,481 － 367,758 1.) From April 1, 2015 to － 1,796,514 － 341,481 － 367,758 March 31, 2016 From April 1, 2016 to － 1,796,514 － 341,481 － 367,758 March 31, 2017 From April 1, 2017 to － 1,796,514 － 341,481 － 367,758 March 31, 2018 (Notes) 1. The number of shares issued was decreased by 32,639,400 dated April 18, 2014 due to cancellation of such number of treasury stock based on the resolution of the meeting of the Board of Directors held on March 26, 2014. 2. The number of shares issued was decreased by 54,168,500 dated April 20, 2018 due to cancellation of such number of treasury stock based on the resolution of the meeting of the Board of Directors held on February 2, 2018.
(5) Status of Shareholders As of March 31, 2018
Status of shares (1 unit = 100 shares)
Foreign shareholders Shares under Classification National and Financial Securities Other Foreign Individuals local Total one unit institutions companies corporations shareholders and other Individuals governments other than individuals Number of shareholders － 276 66 2,473 867 281 307,489 311,452 － (persons) Number of shares held － 6,655,917 704,064 873,311 5,037,092 6,199 4,677,977 17,954,560 1,058,127 (units)
Ratio (%) － 37.07 3.92 4.86 28.05 0.03 26.05 100 － (Notes) 1. Of treasury stock of 58,602,512 shares, 586,025 units (58,602,500 shares) are included in “Individuals and other,” and 12 shares are included in “Shares under one unit.” 2. Of 1,715 shares registered in the name of Japan Securities Depositary Center, Inc., 17 units (1,700 shares) are included in “Other corporations,” and 15 shares are included in “Shares under one unit.”
69 (6) Status of Major Shareholders As of March 31, 2018
Number of Percentage of Name of shareholders Location shares held common stock (Thousands) issued (%) The Master Trust Bank of Japan, Ltd. 11-3, Hamamatsucho 2-chome, Minato-ku, Tokyo 136,153 7.83 (trust account) Japan Trustee Services Bank, Ltd. 8-11, Harumi 1-chome, Chuo-ku, Tokyo 91,981 5.29 (trust account) Japan Trustee Services Bank, Ltd. 8-11, Harumi 1-chome, Chuo-ku, Tokyo 41,448 2.38 (trust account 9) Nippon Life Insurance Company 6-6, Marunouchi 1-chome, Chiyoda-ku, Tokyo 35,070 2.01 Japan Trustee Services Bank, Ltd. 8-11, Harumi 1-chome, Chuo-ku, Tokyo 31,972 1.83 (trust account 5) STATE STREET BANK WEST CLIENT 1776, HERITAGE DRIVE, NORTH QUINCY, －TREATY 505234 MA 02171, U. S. A. 31,512 1.81 (Standing agent: Mizuho Bank, Ltd.) (15-1, Konan 2-chome, Minato-ku, Tokyo) Sumitomo Mitsui Banking Corporation 1-2, Marunouchi 1-chome, Chiyoda-ku, Tokyo 25,667 1.47 Japan Trustee Services Bank, Ltd. 8-11, Harumi 1-chome, Chuo-ku, Tokyo 24,682 1.42 (trust account 7) Japan Trustee Services Bank, Ltd. 8-11, Harumi 1-chome, Chuo-ku, Tokyo 23,749 1.36 (trust account 1) Japan Trustee Services Bank, Ltd. 8-11, Harumi 1-chome, Chuo-ku, Tokyo 23,396 1.34 (trust account 2) Total 465,633 26.79 (Notes) 1. In addition to the shares listed above, the Company holds treasury stock of 58,602 thousand shares. The Percentage of common stock issued is calculated excluding treasury stock. 2. The number of shares is rounded down to the nearest thousand. 3. Percentage of common stock issued is rounded down to two decimal places. 4. The status of major shareholders shown above does not include the following reports on possession of large volume and change reports pertaining to reports on possession of large volume that were filed with the Director-General of the Kanto Local Finance Bureau in the past three fiscal years, as it is not possible for us to confirm the actual status of the shareholding ratio as of March 31, 2018, which is the end of our fiscal year. Reports by large volume shareholders include portions held by joint holders.
Name of shareholders Ownership as of Number of shares owned Holding ratio (%)
BlackRock Japan Co., Ltd. July 29, 2016 93,768,268 5.22
Mizuho Bank, Ltd. October 14, 2016 103,960,540 5.79
Mizuho Bank, Ltd. June 15, 2017 84,546,818 4.71 Mitsubishi UFJ Financial September 25, 2017 144,322,236 8.03 Group, Inc. Mizuho Bank, Ltd. September 29, 2017 92,121,763 5.13 Mitsubishi UFJ Financial December 11, 2017 126,340,243 7.03 Group, Inc. BlackRock Japan Co., Ltd. February 28, 2018 111,861,699 6.23
70 (7) Status of Voting Rights
1) Shares Issued As of March 31, 2018
Number of shares Number of voting rights Classification Description (Shares) (Units) Shares without voting rights － － － Shares with restricted voting rights － － － (Treasury stock, etc.) Shares with restricted voting rights － － － (Others) (Treasury stock) Shares with full voting rights Common stock － － (Treasury stock, etc.) 58,602,500 Shares with full voting rights Common stock 17,368,535 － (Others) 1,736,853,500 Common stock Shares under one unit Shares under one unit － 1,058,127 (100 shares) Total shares issued 1,796,514,127 － － Total voting rights held by all shareholders － 17,368,535 － (Notes) 1. In the column “Shares with full voting rights (Others),” “1,736,853,500 shares in common stock” and “17,368,535 units of voting rights” include 17 units (1,700 shares) and 17 units of voting rights within those shares, all of which are registered in the name of Japan Securities Depositary Center, Inc. 2. In the column “Shares under one unit,” “1,058,127 shares in common stock” include 12 shares of treasury stock (under one unit) held by Mitsui and 15 shares (under one unit) that are registered in the name of Japan Securities Depositary Center, Inc.
2) Treasury Stock, etc. As of March 31, 2018
Number of Number of shares Name of shares held Percentage of Addresses of shareholders held under own Total shareholders under the name interest (%) name of others Mitsui & Co., Ltd. 1-3, Marunouchi, 1-chome, 58,602,500 － 58,602,500 3.26 (Treasury stock) Chiyoda-ku Total － 58,602,500 － 58,602,500 3.26
71 2. Acquisition of Treasury Stock and Other Related Status
[Class of shares] Acquisition of shares of common stock falling under Article 155, Item 3 and 7 of the Companies Act of Japan
(1) Acquisition of Treasury Stock Based on a Resolution Approved at the Ordinary General Meeting of Shareholders
Not applicable.
(2) Acquisition of Treasury Stock Based on a Resolution Approved by the Board of Directors
Acquisition falling under Article 155, Item 3 of the Companies Act of Japan Classification Number of shares (Shares） Total amount (Yen) Details of resolution at meeting of Board of Directors (February 2, 2018） 30,000,000 50,000,000,000 (Acquisition period: February 5, 2018 to March 15, 2018） Treasury stock acquired before the current fiscal year － － Treasury stock acquired during the current fiscal year 26,168,500 49,999,982,251 Number of shares and total amount of outstanding － － shares of resolution
Ratio of non-exercised portion at the end of the － － current fiscal year（%) Treasury stock acquired during the current period for － － acquisition Ratio of non-exercised portion as of issuance date of － － this report（%)
(3) Acquisition of Treasury Stock not Based on a Resolution Approved at the Ordinary General Meeting of Shareholders or a Resolution Approved by the Board of Directors
Acquisition falling under Article 155, Item 7 of the Companies Act of Japan Classification Number of shares (Shares) Total amount (Yen)
Treasury stock acquired during the current fiscal year 12,869 21,887,156 Treasury stock acquired during the current period for 1,527 2,898,086 acquisition (Note) (Note) “Treasury stock acquired during the current period for acquisition” does not include shares constituting less than one full unit purchased during the period from June 1, 2018, to the issuance date of this report.
(4) Current Status of the Disposition and Holding of Acquired Treasury Stock
Current fiscal year Current period for acquisition Classification Number of Total disposition Number of Total disposition shares (Shares) amount (Yen) shares (Shares) amount (Yen) Acquired treasury stock for which subscribers were － － － － solicited Acquired treasury stock that was disposed of － － 54,168,500 － Acquired treasury stock for which transfer of shares was conducted in association with merger/stock － － － － exchange/corporate separation Others (Sold due to demand for sale of shares 35,726 30,310,735 7,275 6,160,350 constituting less than one full unit etc.) (Note 1) Number of shares of treasury stock held (Note 2) 58,602,512 － 4,428,264 － (Notes) 1. The items listed in the "Others" row for the Current fiscal year column are classified into (i) Exercise of the stock options (Number of shares: 35,300 / Total disposition amount: 29,546,100) and (ii) Sold due to demand for sale of shares constituting less than one full unit (Number of shares: 426 / Total disposition amount: 764,635), and the items listed in the "Others" row for the Current period for acquisition column are classified into (i) Exercise of the stock options (Number of shares: 7,200 / Total disposition amount: 6,026,400) and (ii) Sold due to demand for sale of shares constituting less than one full unit (Number of shares: 75 / Total disposition amount: 133,950). Treasury stock disposed of during the current period for acquisition does not include shares constituting less than one full unit sold during the period from June 1, 2018, to the issuance date of this report. 2. Number of shares of treasury stock held during the current period for acquisition does not include shares constituting less than one full unit purchased or sold during the period from June 1, 2018, to the issuance date of this report.
72 3. Shareholder Return Policy
Our profit distribution policy has been resolved as follows at the Board of Directors through discussion in which External Directors were also involved: ・ In order to increase corporate value and maximize shareholder value, we seek to maintain an optimal balance between (a) meeting investment demand in our core and growth areas through re-investments of our retained earnings, and (b) directly providing returns to shareholders by paying out cash dividends. ・ In addition to the above, in relation to share buyback toward improving capital efficiency, we judge that the decision by the Board of Directors in a prompt and flexible manner as needed concerning its timing and amount by taking into consideration of the business environment such as, future investment activity trends, free cash flow and interest-bearing debt levels, and return on equity, continues to contribute to enhancement of corporate value.
Our basic policy is to pay dividends from retained earnings twice a year as interim dividend and year-end dividend. The Articles of Incorporation stipulate that Mitsui may pay interim dividends, by a resolution of the Board of Directors, where September 30th of each year is set as the record date. Meanwhile, our year-end dividend shall be resolved by General Meeting of Shareholders.
It was resolved that the year-end dividend for the year ended March 31, 2018 was ¥40 per share. The annual dividend for the year ended March 31, 2018 was ¥70, including the interim dividend of ¥30 per share.
For the period of the Medium-term Management Plan, we have established a target minimum annual dividend amount of ¥100 billion, based on our assessment of achievable stable core operating cash flow, with the aim of ensuring a certain level of return to shareholders regardless of changes in the external environment. While our principal intension is to steadily increase dividends through improvements in corporate performance, we will also consider flexible ways to address shareholder compensation, provided that sufficient retained earnings is secured for future business development.
For the year ending March 31, 2019, we currently envisage an annual dividend of ¥70 per share, the same amount as the year ended March 31, 2018, taking into consideration of core operating cash flow and profit for the year attributable to owners of the parent as well as stability and continuity of the amount of dividend. We will review our actual results and other business environment before finally deciding the amount to be paid out.
Dividends for the year ended March 31, 2018 were as follows: (a) The interim dividend which the Board of Directors resolved on November 2, 2017 Total dividend amount of ¥52,923 million; ¥30 per share (b) The year-end dividend which Ordinary General Meeting of Shareholders resolved on June 21, 2018 Total dividend amount of ¥69,516 million; ¥40 per share
73 4. Trends in the Market Price of Mitsui’s Shares
(1) Highest and Lowest Prices by Fiscal Year during the Past Five Years
Fiscal year 99th 98th 97th 96th 95th Year-end March 2018 March 2017 March 2016 March 2015 March 2014 Highest (Yen) 2,042 1,753 1,759 1,820 1,636 Lowest (Yen) 1,476 1,156 1,164 1,402 1,193 (Note) The above prices are quoted on the first section of the Tokyo Stock Exchange.
(2) Highest and Lowest Prices by Month during the Past Six Months
October November December January February March Month 2017 2017 2017 2018 2018 2018 Highest (Yen) 1,714.0 1,762.5 1,850.0 1,979.5 2,042.0 1,935.5 Lowest (Yen) 1,617.5 1,624.0 1,658.0 1,854.5 1,851.5 1,776.5 (Note) The above prices are quoted on the first section of the Tokyo Stock Exchange.
74 5. Members of the Board of Directors and Audit & Supervisory Board Members
16 male Directors and Audit & Supervisory Board Members and 3 female Directors and an Audit & Supervisory Board Member (percentage of female: 15.8%)
Directors
Name Masami Iijima (1) Date of Birth September 23, 1950 Shareholdings as of March 31, 2018 95,833
Prior Positions ・1974/4 Joined Mitsui & Co., Ltd. ・2006/4 Managing Officer, Chief Operating Officer of Iron & Steel Raw Materials and Non-Ferrous Metals Business Unit ・2007/4 Managing Officer, Chief Operating Officer of Mineral & Metal Resources Business Unit ・2008/4 Executive Managing Officer ・2008/6 Representative Director, Executive Managing Officer ・2008/10 Representative Director, Senior Executive Managing Officer ・2009/4 Representative Director, President and Chief Executive Officer ・2015/4 Representative Director, Chairman of the Board of Directors (current position) ・2016/6 External Director, Ricoh Company, Ltd. (current position) ・2018/6 External Director, SoftBank Group Corp. (current position)
Name Tatsuo Yasunaga (1) Date of Birth December 13, 1960 Shareholdings as of March 31, 2018 36,100
Prior Positions ・1983/4 Joined Mitsui & Co., Ltd. ・2013/4 Managing Officer, Chief Operating Officer of Integrated Transportation Systems Business Unit ・2015/4 President and Chief Executive Officer ・2015/6 Representative Director, President and Chief Executive Officer (current position)
Name Makoto Suzuki (1) Date of Birth April 13, 1958 Shareholdings as of March 31, 2018 57,931
Prior Positions ・1981/4 Joined Mitsui & Co., Ltd. ・2011/4 Managing Officer, Chief Representative of Mitsui & Co., Ltd. in South West Asia ・2013/4 Executive Managing Officer, Chief Representative of Mitsui & Co., Ltd. in South West Asia ・2015/4 Senior Executive Managing Officer, Chief Compliance Officer ・2015/6 Representative Director, Senior Executive Managing Officer, Chief Compliance Officer ・2017/4 Representative Director, Executive Vice President, Chief Compliance Officer (current position)
Name Satoshi Tanaka (1) Date of Birth February 27, 1958 Shareholdings as of March 31, 2018 43,292
Prior Positions ・1981/4 Joined Mitsui & Co., Ltd. ・2011/4 Managing Officer, Chief Operating Officer of Consumer Service Business Unit ・2013/4 Executive Managing Officer, Chief Operating Officer of Consumer Service Business Unit ・2015/4 Senior Executive Managing Officer, Chief Operating Officer of Asia Pacific Business Unit and President of Mitsui & Co. (Asia Pacific) Pte. Ltd. ・2017/4 Executive Vice President, Chief Administrative Officer, Chief Information Officer, Chief Privacy Officer ・2017/6 Representative Director, Executive Vice President, Chief Administrative Officer, Chief Information Officer, Chief Privacy Officer (current position)
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Name Shinsuke Fujii (1) Date of Birth December 8, 1958 Shareholdings as of March 31, 2018 19,589
Prior Positions ・1981/4 Joined Mitsui & Co., Ltd. ・2013/4 Managing Officer, President of Mitsui & Co. (Brasil) S.A. ・2015/4 Executive Managing Officer, General Manager of Investment Administrative Division ・2016/4 Executive Managing Officer ・2016/6 Representative Director, Executive Managing Officer ・2017/4 Representative Director, Senior Executive Managing Officer ・2018/4 Representative Director, Executive Vice President (current position)
Name Nobuaki Kitamori (1) Date of Birth October 8, 1958 Shareholdings as of March 31, 2018 23,733
Prior Positions ・1983/4 Joined Mitsui & Co., Ltd. ・2013/4 Managing Officer, General Manager of Human Resources & General Affairs Division ・2015/4 Managing Officer, Chief Operating Officer of IT & Communication Business Unit ・2016/4 Executive Managing Officer, Chief Operating Officer of IT & Communication Business Unit ・2017/4 Executive Managing Officer ・2017/5 Executive Managing Officer, Chief Digital Officer ・2017/6 Representative Director, Executive Managing Officer, Chief Digital Officer ・2018/4 Representative Director, Senior Executive Managing Officer, Chief Digital Officer (current position)
Name Yukio Takebe (1) Date of Birth April 8, 1960 Shareholdings as of March 31, 2018 16,204
Prior Positions ・1983/4 Joined Mitsui & Co., Ltd. ・2013/4 Managing Officer, Chief Operating Officer of Mineral & Metal Resources Business Unit ・2015/4 Managing Officer, President & Chief Executive Officer of P.T. Mitsui Indonesia ・2016/4 Executive Managing Officer, Chairman & CEO of Mitsui & Co. (Australia) Ltd. and Chairman of Mitsui & Co. (N.Z.) Ltd. ・2018/4 Senior Executive Managing Officer ・2018/6 Representative Director, Senior Executive Managing Officer (current position)
Name Takakazu Uchida (1) Date of Birth September 24, 1960 Shareholdings as of March 31, 2018 19,475
Prior Positions ・1983/4 Joined Mitsui & Co., Ltd. ・2014/4 Managing Officer, General Manager of Finance Division ・2017/4 Executive Managing Officer, General Manager of Finance Division ・2018/4 Executive Managing Officer, Chief Financial Officer ・2018/6 Representative Director, Executive Managing Officer, Chief Financial Officer (current position)
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Name Kenichi Hori (1) Date of Birth January 2, 1962 Shareholdings as of March 31, 2018 11,729
Prior Positions ・1984/4 Joined Mitsui & Co., Ltd. ・2014/4 Managing Officer, General Manager of Corporate Planning & Strategy Division ・2016/4 Managing Officer, Chief Operating Officer of Nutrition & Agriculture Business Unit ・2017/4 Executive Managing Officer, Chief Operating Officer of Nutrition & Agriculture Business Unit ・2018/4 Executive Managing Officer ・2018/6 Representative Director, Executive Managing Officer (current position)
Name Toshiro Muto (1) Date of Birth July 2, 1943 Shareholdings as of March 31, 2018 12,928
Prior Positions ・1966/4 Entered the Ministry of Finance ・1999/7 Director-General of the Budget Bureau, Ministry of Finance ・2000/6 Administrative Vice Minister, Ministry of Finance ・2003/1 Special Advisor, Ministry of Finance ・2003/3 Deputy Governor, Bank of Japan ・2008/7 Chairman, Daiwa Institute of Research Ltd. (current position) ・2009/4 Director, Principal, The Kaisei Academy ・2010/6 External Director, Mitsui & Co., Ltd. (current position)
Name Izumi Kobayashi (1) Date of Birth January 18, 1959 Shareholdings as of March 31, 2018 2,820
Prior Positions ・1981/4 Joined Mitsubishi Chemical Industries, Ltd. (currently Mitsubishi Chemical Corporation) ・1985/6 Joined Merrill Lynch Futures Japan Inc. ・2001/12 President, Merrill Lynch Japan Securities Co., Ltd. ・2002/7 External Director, Osaka Securities Exchange Co., Ltd. ・2008/11 Executive Vice President, Multilateral Investment Guarantee Agency, World Bank Group ・2014/6 External Director, Mitsui & Co., Ltd. (current position) ・2015/4 Vice Chairperson, Japan Association of Corporate Executives (current position)
Name Jenifer Rogers (1) Date of Birth June 22, 1963 Shareholdings as of March 31, 2018 3,565
Prior Positions ・1989/9 Joined Haight Gardner Poor & Havens (currently Holland & Knight LLP) ・1990/12 Registered as Attorney at Law admitted in New York ・1991/2 Joined Industrial Bank of Japan Limited, New York Branch (currently Mizuho Bank) ・1994/12 Joined Merrill Lynch Japan Securities Co., Ltd. ・2000/11 Merrill Lynch Europe Plc ・2006/7 Bank of America Merrill Lynch (Hong Kong) ・2012/11 General Counsel Asia, NEW Asurion Asia Pacific Japan LLC (currently Asurion Japan Holdings G.K.) (current position) ・2015/6 External Director, Mitsui & Co., Ltd. (current position)
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Name Hirotaka Takeuchi (1) Date of Birth October 16, 1946 Shareholdings as of March 31, 2018 －
Prior Positions ・1969/4 Joined McCann-Erickson Hakuhodo Co., Ltd. (currently McCann Erickson Japan Inc.) ・1976/9 Lecturer, Harvard Business School ・1977/12 Associate Professor, Harvard Business School ・1983/4 Associate Professor, Hitotsubashi University-Faculty of Commerce and Management ・1987/4 Professor, Hitotsubashi University-Faculty of Commerce and Management ・1998/4 Dean of The Graduate School of International Corporate Strategy, Hitotsubashi University ・2010/4 Professor Emeritus, Hitotsubashi University (current position) ・2010/7 Professor, Harvard Business School (current position) ・2016/6 External Director, Mitsui & Co., Ltd. (current position)
Name Samuel Walsh (1) Date of Birth December 27, 1949 Shareholdings as of March 31, 2018 2,700
Prior Positions ・1972/2 Joined General Motors Holden's Limited ・1987/6 Joined Nissan Motor Australia ・1991/9 Joined Rio Tinto Limited ・2013/1 Chief Executive Officer, Rio Tinto Limited ・2016/11 Global President, The Chartered Institute of Procurement and Supply (current position) ・2017/2 Chairman, The Accenture Global Mining Executive Council (current position) ・2017/6 External Director, Mitsui & Co., Ltd. (current position) ・2017/10 Chairman, Royal Flying Doctor Service (WA) (current position)
Audit & Supervisory Board Members
Name Joji Okada (2) Date of Birth October 10, 1951 Shareholdings as of March 31, 2018 44,371
Prior Positions ・1974/4 Joined Mitsui & Co., Ltd. ・2008/4 Managing Officer, General Manager of Accounting Division ・2009/4 Managing Officer, Deputy Chief Financial Officer, General Manager of Global Controller Division ・2010/4 Executive Managing Officer, Deputy Chief Financial Officer, General Manager of Global Controller Division ・2011/4 Executive Managing Officer, Chief Financial Officer ・2011/6 Representative Director, Executive Managing Officer, Chief Financial Officer ・2012/4 Representative Director, Senior Executive Managing Officer, Chief Financial Officer ・2014/4 Representative Director, Executive Vice President, Chief Financial Officer ・2015/4 Director ・2015/6 Full-time Audit & Supervisory Board Member (current position) ・2017/11 Chairperson, Japan Audit & Supervisory Board Members Association (current position)
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Name Takashi Yamauchi (2) Date of Birth May 3, 1951 Shareholdings as of March 31, 2018 60,511
Prior Positions ・1976/4 Joined Mitsui & Co., Ltd. ・2008/4 Managing Officer, Chief Operating Officer of Iron & Steel Products Business Unit ・2010/4 Executive Managing Officer, Chief Operating Officer of Transportation Logistics Business Unit ・2011/4 Executive Managing Officer, Chief Operating Officer of Asia Pacific Business Unit ・2013/4 Senior Executive Managing Officer, Chief Operating Officer of Asia Pacific Business Unit ・2014/4 Executive Vice President, Chief Operating Officer of Asia Pacific Business Unit ・2015/4 Executive Vice President ・2015/6 Full-time Audit & Supervisory Board Member (current position)
Name Haruka Matsuyama (4) Date of Birth August 22, 1967 Shareholdings as of March 31, 2018 1,411
Prior Positions ・1995/4 Appointed to Assistant Judge at Tokyo District Court ・2000/7 Registered as Attorney at Law ・2000/7 Joined Hibiya Park Law Offices ・2002/1 Partner of Hibiya Park Law Offices (current position) ・2014/6 External Audit & Supervisory Board Member, Mitsui & Co., Ltd. (current position)
Name Hiroshi Ozu (2) Date of Birth July 21, 1949 Shareholdings as of March 31, 2018 1,052
Prior Positions ・1974/4 Appointed to Public Prosecutor ・2007/7 Vice Minister of Justice ・2012/7 Attorney General ・2014/9 Registered as Attorney at Law ・2015/6 External Audit & Supervisory Board Member, Mitsui & Co., Ltd. (current position)
Name Kimitaka Mori (3) Date of Birth June 30, 1957 Shareholdings as of March 31, 2018 1,812
Prior Positions ・1980/4 Joined Shinwa Accountants (currently KPMG AZSA LLC) ・2000/6 Representative Partner ・2004/6 Director of financial services ・2006/6 Board Member ・2011/7 Chairman, KPMG FS Japan ・2013/7 Established Mori Certified Public Accountant Office ・2013/7 Chairman and President, The Japanese Institute of Certified Public Accountants ・2016/7 Senior Advisor, The Japanese Institute of Certified Public Accountants (current position) ・2017/6 External Audit & Supervisory Board Member, Mitsui & Co., Ltd. (current position)
(1) Current term of office will expire at the close of the Ordinary General Meeting of Shareholders in June 2019. (2) Current term of office will expire at the close of the Ordinary General Meeting of Shareholders in June 2019. (3) Current term of office will expire at the close of the Ordinary General Meeting of Shareholders in June 2021. (4) Current term of office will expire at the close of the Ordinary General Meeting of Shareholders in June 2022. (5) Mr. Toshiro Muto, Ms. Izumi Kobayashi, Ms. Jenifer Rogers, Mr. Hirotaka Takeuchi and Mr. Samuel Walsh are External Directors. Ms. Haruka Matsuyama, Mr. Hiroshi Ozu and Mr. Kimitaka Mori are External Audit & Supervisory Board Members. Mr. Joji Okada and Mr. Takashi Yamauchi are full-time Audit & Supervisory Board Members. (6) Ms. Matsuyama’s name as it appears in her family registry is Haruka Kato.
79
Mitsui introduced the Managing Officer System in April 2002. Managing Officers as of June 21, 2018 are as follows: (* Serves concurrently as Director)
Managing Officers
Name Title and Principal Positions Tatsuo Yasunaga* President and Chief Executive Officer; Chairman, Internal Controls Committee; Head of Crisis Management Headquarters Makoto Suzuki* Executive Vice President; Chief Compliance Officer; Corporate Staff Unit (Secretariat, Audit & Supervisory Board Member Division, Human Resources & General Affairs Division, Legal Division, Corporate Logistics Division, New Head Office Building Development Department); Business Continuity Management; New Headquarter Project; Chairman, Compliance Committee; Chairman, Diversity Promotion Committee; Head of Emergency Management Headquarter Satoshi Tanaka* Executive Vice President; Chief Administrative Officer; Chief Information Officer; Chief Privacy Officer; Corporate Staff Unit (Corporate Planning & Strategy Division, Investment Administrative Division, Information Technology Promotion Division, Regional Business Promotion Division, Corporate Communications Division, Environmental·Social Contribution Division, Business Supporting Unit (Each Planning & Administrative Division)); Domestic Offices and Branches; HQ Overseen Region; Business Innovation & Incubation; Environmental Matters; Chairman, Information Strategy Committee; Chairman, Sustainability Committee; Chairman, Business Innovation Committee Shinsuke Fujii* Executive Vice President; Healthcare & Service Business Unit; Consumer Business Unit; Corporate Development Business Unit; Chairman, Portfolio Management Committee Nobuaki Kitamori* Senior Executive Managing Officer; Chief Digital Officer; Infrastructure Projects Business Unit; Integrated Transportation Systems Business Unit I; Integrated Transportation Systems Business Unit II; IT & Communication Business Unit; Digital Transformation Yukio Takebe* Senior Executive Managing Officer; Iron & Steel Products Business Unit; Mineral & Metal Resources Business Unit; Energy Business Unit I; Energy Business Unit II Taku Morimoto Senior Executive Managing Officer; Chief Operating Officer of Asia Pacific Business Unit Yasuyuki Fujitani Senior Executive Managing Officer; Chief Operating Officer of EMEA (Europe, the Middle East and Africa) Business Unit Motoo Ono Senior Executive Managing Officer; Chief Representative of Mitsui & Co., Ltd. in China Takakazu Uchida* Executive Managing Officer; Chief Financial Officer; Corporate Staff Unit (CFO Planning & Administrative Division, Global Controller Division, Finance Division, Risk Management Division, Investor Relations Division, Business Supporting Unit (Financial Management & Advisory Division I, II, III, IV)); Chairman, Disclosure Committee; Chairman, J- SOX Committee Kenichi Hori* Executive Managing Officer, Basic Materials Business Unit; Performance Materials Business Unit; Nutrition & Agriculture Business Unit; Food Business Unit; Food & Retail Management Business Unit Shinsuke Kitagawa Executive Managing Officer, General Manager of Osaka Office Noboru Katsu Executive Managing Officer; Chairman & CEO of Mitsui & Co. (Australia) Ltd. Hiromichi Yagi Executive Managing Officer; Chief Representative of Mitsui & Co., Ltd. in South West Asia; Managing Director, Mitsui & Co., India Pvt. Ltd. Shinichiro Omachi Executive Managing Officer; Chief Operating Officer of Mineral & Metal Resources Business Unit Hiroyuki Tsurugi Executive Managing Officer; Representative Director, President & CEO of Mitsui Oil Exploration Co., Ltd. Hirotatsu Fujiwara Executive Managing Officer; Chief Operating Officer of Energy Business Unit II Shingo Sato Executive Managing Officer; Chief Operating Officer of Integrated Transportation Systems Business Unit I Katsurao Yoshimori Executive Managing Officer; Chief Operating Officer of Americas Business Unit Osamu Toriumi Executive Managing Officer; General Manager of Internal Auditing Division
80 Name Title and Principal Positions Shinji Tsuchiya Executive Managing Officer; President of Mitsui & Co. (Brasil) S.A. Shin Hatori Managing Officer; General Manager of Nagoya Office Hiroshi Meguro Managing Officer; Deputy Chief Administrative Officer (HQ Overseen Region) Kimiro Shiotani Managing Officer; General Manager of Global Controller Division Miki Yoshikawa Managing Officer; Chief Operating Officer of Food Business Unit Yoshio Kometani Managing Officer; Chief Operating Officer of Infrastructure Projects Business Unit Toshiaki Maruoka Managing Officer; Chief Representative of Mitsui & Co., Ltd. in CIS; General Director of Mitsui & Co. Moscow LLC Motoaki Uno Managing Officer; President & CEO of P.T. Mitsui Indonesia Koji Nagatomi Managing Officer; Chief Operating Officer of Healthcare & Service Business Unit Kohei Takata Managing Officer; Chief Operating Officer of Nutrition & Agriculture Business Unit Sayu Ueno Managing Officer; Chief Operating Officer of Basic Materials Business Unit Yumi Yamaguchi Managing Officer; President & CEO, Mitsui Global Strategic Studies Institute Masaki Saito Managing Officer; Chief Operating Officer of IT & Communication Business Unit Takeshi Setozaki Managing Officer; Chief Operating Officer of Integrated Transportation Systems Business Unit II Reiji Fujita Managing Officer; Chief Operating Officer of Consumer Business Unit; General Manager of New Head Office Building Development Department Takeo Kato Managing Officer; Chief Operating Officer of Performance Materials Business Unit Yuki Kodera Managing Officer; General Manager of Planning & Administrative Division (Metals) Hirohiko Miyata Managing Officer; General Manager of Investment Administrative Division Yoshiki Hirabayashi Managing Officer; Chief Operating Officer of Food & Retail Management Business Unit Yoshiaki Takemasu Managing Officer; General Manager of Human Resources & General Affairs Division Yoshimitsu Gushiken Managing Officer; General Manager of Finance Division Shinichi Hori Managing Officer; Chief Operating Officer of Iron & Steel Products Business Unit Shinichi Kikuchihara Managing Officer; Chief Operating Officer of Corporate Development Business Unit Masaharu Okubo Managing Officer; Chief Operating Officer of Energy Business Unit I
81 6. Corporate Governance
(1) Corporate Governance
1) Basic Corporate Governance Policy
In structuring the corporate governance framework, Mitsui places emphasis on “improved transparency and accountability” and “clarification of the division of roles between management oversight and execution.” For the “improved transparency and accountability,” Mitsui ensures sound supervision and monitoring of management with the view point of External Directors and External Audit & Supervisory Board Members (hereinafter referred to as the "external members"). Mitsui has also established an internal control system for disclosure so that all executives and employees fulfill their accountability to stakeholders under the principle of fair disclosure. For “clarification of the division of roles between management oversight and execution,” Mitsui delegates execution of business to Managing Officers substantially while the Board of Directors retains a supervisory role over Managing Officers’ business activities. Chief Operating Officers of 16 business units within headquarters and 3 regional business units serve concurrently as Managing Officers and engage in business operation for the consolidated group in a responsive and flexible manner. While increasing the effectiveness of supervisory functions by having Audit & Supervisory Board Members, Mitsui implements corporate governance by maintaining an Audit & Supervisory Board system because it believes that having internal Directors who are familiar with our business practices and operations is essential to the business of a general trading company. By adopting a Committee System in which External Directors and External Audit & Supervisory Board Members participate, Mitsui achieves highly effective corporate governance to secure “improved transparency and accountability” and “clarification of the division of roles between management oversight and execution.” In order to realize effective corporate governance for shareholders and other stakeholders, Mitsui has established, and maintains, the following structures:
ⅰ) The Board of Directors is the highest authority for execution of business and supervision, and in order to secure this function, Mitsui has set the number of Directors to the maximum number that permits substantial discussions. As advisory committees to the Board of Directors, Mitsui also has in place the Governance Committee, the Nomination Committee and the Remuneration Committee, in which External Directors and/or External Audit & Supervisory Board Members participate as members.
ⅱ) The Audit & Supervisory Board Members supervise the Directors’ execution of duties as an independent institution with the mandate of the shareholders. For this purpose, Audit & Supervisory Board Members carry out multi-faceted, effective audit activities such as attending important internal meetings, verifying reports and investigating our business, and take necessary measures in a timely manner.
Regarding Mitsui’s basic views and policies on Corporate Governance, we published “Mitsui & Co., Ltd. Corporate Governance and Internal Control Principles” on Mitsui’s website as follows. (http://www.mitsui.com/jp/ja/company/outline/governance/system/pdf/corp_gov.pdf)
Mitsui complies with all Principles of the Corporate Governance Code. Please see the “Corporate Governance Report” which we presented to the Tokyo Stock Exchange and other stock exchanges.
2) Corporate Governance Structure of Mitsui
ⅰ) Status of the Board of Directors - Upon the introduction of the Managing Officer System in April 2002, the number of Directors was reduced from 38 to 11 in June 2002. In June 2003, the first External Director was appointed, and since the Ordinary General Meeting of Shareholders held in June 2015, five External Directors have been appointed.
- The Chairman is a director and is authorized to call for a meeting of the Board of Directors and to serve as a chairman of the meeting. As of the date of the issuance of this report, 14 Directors (including 2 female External Directors, and the percentage of female Directors is 14.3%) are appointed, 8 of whom also serve as Managing Officers.
82 - Mitsui has limited the number of Directors to the maximum to enable substantial discussions and gives priority to the appointment of new External Directors in the case of increasing the number of board members in order to enhance the division of roles between management oversight and execution. The tenure of Directors is one year, and Directors can be reappointed.
- In accordance with the Rules of the Board of Directors Regarding Resolutions and Matters to be Reported, the Board of Directors passes resolutions of fundamental policies on management of Mitsui, matters of important business operation, matters mandated by a resolution of the General Meeting of Shareholders and issues prescribed in laws and regulations and in the Articles of Incorporation. The Board of Directors also receives reports on issues prescribed in laws and regulations and the status of important business operations.
- A regular meeting of the Board of Directors is held once every month, and extraordinary meetings are held from time to time, whenever necessary. During the year ended March 31, 2018, 15 meetings were held.
- Further, the meeting composed of all external members is held for the purpose of exchanging information and opinions regarding important matters in management among external members, or among external members, Internal Directors, Full- time Audit & Supervisory Board Members, Independent Auditors and/or Managing Officers.
- Mitsui has entered into agreements with each External Directors respectively limiting their liability as External Directors to legally designated limits pursuant to Article 427, Paragraph 1 of the Companies Act of Japan.
- Mitsui has established the three committees below as advisory bodies to the Board of Directors. The compositions of members as of the date of issuance of this report are as follows:
・ Governance Committee Composition: Chairman of the Board of Directors (the committee chair), President and Chief Executive Officer, three External Directors, one Internal Director, one External Audit & Supervisory Board Member Objectives: To study the state and future vision of Mitsui’s corporate governance with the viewpoints of External Directors and External Audit & Supervisory Board Members
・ Nomination Committee Composition: Two External Directors (one of whom is the committee chair), Chairman, President and Chief Executive Officer, one External Audit & Supervisory Board Member Objectives: To study the selection standards and processes to be applied in nominating Directors and Managing Officers, establish succession planning for President and Chief Executive Officer and other top executives, and evaluate the proposal of Director nomination
・ Remuneration Committee Composition: Two External Directors (one of whom is the committee chair), President and Chief Executive Officer, two Internal Directors, one External Audit & Supervisory Board Member Objectives: To study the system and decision-making process related to remuneration and bonuses for Directors and Managing Officers as well as to evaluate the remuneration proposals for the Directors.
- Each year the Board of Directors analyzes and evaluates its effectiveness as a whole, taking into consideration the relevant matters, including the self-evaluations of each Director, and discloses a summary of the results. A summary of this evaluation for the year ended March 31, 2018 is as described in 6.(1).5).i).(a).
ⅱ) Status of auditing by the Audit & Supervisory Board Members, the Internal Auditing Division and Independent Auditors
(a) Status of the Audit & Supervisory Board
- As of the issuance of this report, there are five Audit & Supervisory Board Members, including two Full-time Audit & Supervisory Board Members and three External Audit & Supervisory Board Members (including one female External Audit & Supervisory Board Member, and the percentage of female Audit & Supervisory Board Member is 20%). A
83 meeting of the Audit & Supervisory Board Members is regularly held prior to a meeting of the Board of Directors and whenever necessary. In the year ended March 31, 2018, 21 meetings were held. Audit & Supervisory Board Members attend the meeting of the Board of Directors and audit the procedure of the meeting and the contents of resolutions as well as other issues, and proactively express their opinions.
- The Guidelines of Auditing by Audit & Supervisory Board Members define the responsibility of Audit & Supervisory Board Members, the frame of mind necessary for them, the framework of audits, audit standards, and codes of conduct. Pursuant to laws and regulations, the Articles of Incorporation and the provision of the Rules of the Audit & Supervisory Board, the Audit & Supervisory Board receives relevant reports, deliberates and/or makes resolutions as to important matters in auditing.
- Each Audit & Supervisory Board Member has a duty to audit the following issues; (i)in the area of business auditing, execution of duties by Directors, decision-making processes at the Board of Directors and others, and the status of operation and improvement of the internal control systems, and (ii)in the area of financial audit, the independence of the Independent Auditors, effectiveness of the internal control systems, system of financial reporting, accounting policies and processing of financial information, audit of financial statements, reviews and reports from the Independent Auditors, and the system of disclosure.
- The Audit & Supervisory Board establishes audit policies and makes audit plans taking into consideration materiality, timeliness and other necessary elements. To conduct effective and efficient audits, the Audit & Supervisory Board coordinates closely with the Independent Auditors and the Internal Auditing Division.
- Full-time Audit & Supervisory Board Members attend important internal meetings and committees, including the Corporate Management Committee. All Audit & Supervisory Board Members have discussions with the Chairman of the Board of Directors and the President & Chief Executive Officer, respectively, on a periodic basis. Full-time Audit & Supervisory Board Members receive reports and exchange opinions at individual meetings with Directors and Managing Officers, as well as regular meetings with the Directors in charge of Corporate Staff Units and general managers in Corporate Staff Units.
- The Audit & Supervisory Board has designated some of the affiliated companies both domestic and overseas as “Affiliated Companies to be Monitored Designated by the Audit & Supervisory Board”. The Audit & Supervisory Board Members conduct auditing on the management status of Mitsui’s subsidiaries through visits to these designated affiliate companies and major subsidiaries as well as through cooperation with audit & supervisory board members at subsidiaries.
- The Audit & Supervisory Board has designated Mr. Joji Okada and Mr. Kimitaka Mori as Audit & Supervisory Board Members who have considerable expertise in finance and accounting.
Mr. Joji Okada joined Mitsui in 1974. Before being elected as Audit & Supervisory Board Member in 2015, he had worked in the field of accounting and was appointed as Managing Officer, General Manager of Accounting Division in 2008, as Executive Managing Officer, Chief Financial Officer in 2011, and as Vice President, Chief Financial Officer in 2014.
Mr. Kimitaka Mori had been working in the field of corporate accounting over the years as a certified public accountant, and holding important positions in that field such as the former Chairman and President of Japanese Institute of Certified Public Accountants.
- Mitsui has entered into agreements with each Audit & Supervisory Board Member respectively limiting their liability as Audit & Supervisory Board Members to legally designated limits, pursuant to Article 427, Paragraph 1 of the Companies Act of Japan.
- We set up the Audit & Supervisory Board Member Division to assist in the performance of the duties of the Audit & Supervisory Board Members, and assign to the Division at least three full-time employees with the appropriate knowledge and abilities necessary for this work.
84 (b) Internal auditing
- Based on the order or approval of the President and Chief Executive Officer, for the purpose of contributing to the effective achievement of management goals, the Internal Auditing Division evaluates how internal control is present and functioning with an emphasis on the effectiveness and efficiency of operations, the reliability of financial reporting, compliance with laws and regulations, as well as safeguarding of Company assets. The adequacy and effectiveness of each process in risk management, control (any action taken by the management toward the achievement of the established goals) and governance (processes and structures implemented by the management to inform, direct, manage and monitor the activities of the organization toward the achievement of its objectives) within each organizational unit shall also be evaluated, and suggestions and proposals shall be made for their improvement.
- In order to ensure the independence and objectivity of internal audits, we have the Internal Auditing Division directly under the rule of the President and Chief Executive Officer. The composition of the personnel in the division as of March 31, 2018, is as follows: of a total of 68 people, which includes one General Manager, 30 internal auditors, 26 members in charge of audits, and 11 staff members; 55 people are stationed in the Internal Auditing Division in the Head Office, 5 people are stationed in Internal Auditing Offices overseas, 4 people are stationed in the Internal Auditing Department within Business Supporting Units, and 4 people are stationed in subsidiaries.
- In the regular audits which cover Mitsui, Overseas Offices, Overseas Trading Subsidiaries, and other subsidiaries, internal auditors carry out independent and objective evaluations, pursuant to the rules on internal audits, etc., with an emphasis on risk management, effectiveness of management and operations, compliance, and appropriate financial reporting. In addition, the following audits are implemented as internal audits: cross-organizational and cross-functional audits by target and item, such as issues involving multiple organizations and business processes or security trade control systems, and extraordinary examinations to get a whole picture of such events that caused or could cause irregular economic losses or that jeopardized or could jeopardize the corporate trust, in order to identify the responsibility and recommend measures to clarify the causes as well as to prevent recurrence. The Internal Auditing Division as an independent department compiles and checks the assessment of the entity-wide internal control regarding the credibility of financial reports, pursuant to the Financial Instruments and Exchange Act of Japan. The final results are reported to the below-mentioned J-SOX Committee.
- For each fiscal year, the internal auditing policy and the internal auditing plan go through the approval process by the President and Chief Executive Officer. Internal audits are implemented either with or without advance notice to the target organization. The internal auditors provide feedback on the results of the internal audit to the organization before preparing the internal audit report and carry out a full exchange of opinions on their suggestions. The audit results are reported to the President and Chief Executive Officer. The reports from the organization on the implementation status of improvements regarding the issues identified are requested and are reevaluated.
(c) Auditing of financial statements
- For the year ended March 31, 2018, the certified public accountants executing audits on our financial statements are the following four people, who all belong to Deloitte Touche Tohmatsu LLC: Yoshio Sato, Takashi Kitamura, Michiyuki Yamamoto and Takenao Ohashi. The number of assistants involved in auditing work is 96 people as of March 31, 2018, and this number is comprised of 36 certified public accountants, 14 members of the Japanese Institute of Junior Accountants, and 46 others.
- In order to secure prompt financial closing and reliability, the auditing work of Mitsui and its consolidated subsidiaries is in principle entrusted solely to Deloitte Touche Tohmatsu. Mitsui’s Independent Auditors implement auditing under the Companies Act of Japan and the Financial Instruments and Exchange Act of Japan as well as auditing of the consolidated financial statements in English.
85 (d) Coordination among Audit & Supervisory Board Members, the Internal Auditing Division and the Independent Auditors, and relationship with divisions involved in internal control
- At the end of the fiscal year, the Independent Auditors report to the Audit & Supervisory Board the audit procedures and results of audits on accounting and internal controls, and exchange opinions on these. During the fiscal year, the Audit & Supervisory Board Members hold monthly meetings with the Independent Auditors and receive reports from the Independent Auditors about their auditing plans, the items of focus in audits, the status of audits and other matters. At the meetings, the participants exchange information and have discussions on the execution of effective and efficient accounting audits and internal control audits.
- In addition to the exchange of information with the Internal Auditing Division for implementing efficient audits, Full- time Audit & Supervisory Board Members in principle attend all of the feedback sessions on regular internal audits by the Internal Auditing Division. The General Manager of the Internal Auditing Division periodically reports on the plans and results of internal audits to the Audit & Supervisory Board. The Audit & Supervisory Board Members, as necessary, request reports on the internal control system, risk evaluation and other matters from the Internal Auditing Division and other divisions responsible for internal controls, and also ask for their cooperation on a wide range of matters in audits.
(e) Coordination between supervision by the External Directors or auditing by External Audit & Supervisory Board Members, the auditing by the Internal Auditing Division, Audit & Supervisory Board Members and the Independent Auditors, and relationship with divisions involved in internal control
- The External Directors and External Audit & Supervisory Board Members, through the meetings of the Board of Directors, the meetings of the Audit & Supervisory Board and the External Members Meetings respectively, mutually coordinate with auditing by the Internal Auditing Division, auditing by Audit & Supervisory Board Members and accounting audits by the Independent Auditors as well as supervise and audit the internal control system. Specifically, they periodically receive reports on the following at the meetings of the Board of Directors and the meetings of the Audit & Supervisory Board, respectively; results and plans of the internal audits, results and plans of auditing by the Audit & Supervisory Board, summary of the management letter by the Independent Auditors, results of the internal control system assessment in accordance with the Financial Instruments and Exchange Act of Japan, the operational status of compliance programs, and other matters regarding the management and improvement of the internal control systems. At the External Members Meetings, External Directors, Audit & Supervisory Board Members and the Independent Auditors mutually exchange information and opinions regarding the policy of audits.
ⅲ) Framework for internal control and execution of business activities
- Ultimate responsibility for execution of business operations lies with the President and Chief Executive Officer. The President and Chief Executive Officer delegates authority to the Chief Operating Officers of the business units and regional business units, who, in turn, report to the President and Chief Executive Officer. The Corporate Management Committee is organized for deliberating the basic policies and important matters relating to the overall management. The Committee consists of the Chairman of the Board of Directors, President and Chief Executive Officer (the committee chair), the Directors in charge of Corporate Staff Units, and Representative Directors or Managing Officers nominated by the President and Chief Executive Officer. The Corporate Management Committee is held weekly in principle. Matters referred to the Corporate Management Committee meeting are determined by the President and Chief Executive Officer, taking into consideration discussions among the Committee members.
- As mentioned above, the Internal Auditing Division, the division positioned directly under the President and Chief Executive Officer, examines the status of development and implementation of the internal control of Mitsui. With the delisting from NASDAQ in April 2011 and the termination of SEC registration in July 2011, Mitsui has implemented the internal control framework based on Japanese regulation from the year ended March 31, 2012. Even after the transition, Mitsui maintains its internal control system by positioning the internal control as the structure by which the management controls the executive body, aiming for: (1) “Improvement of effectiveness and efficiency of operations,” (2) “Compliance with accounting standards and securing reliability of financial reporting,” (3) “Compliance with laws, rules that are equivalent to the laws, and observance of management philosophy and company rules including all codes of conduct which reflect this philosophy,” and (4) “The safeguarding of company assets;” and consists of: “control environment,” “risk assessment,”
86 “control activities,” “information and communication,” “monitoring,” and “response to IT.” These objectives and components are as stated in the basic framework designated in “Standards and Practice Standards for Management Assessment and Audit concerning Internal Control Over Financial Reporting,” issued by the advisory board to the Commissioner of the Financial Services Agency.
- Mitsui has established major committees pertaining to the execution of business and implementation of internal control as follows, and is taking measures to respond to a wide range of risks and forms of businesses, which continue to increase and diversify.
・ Internal Controls Committee Chaired by the President and Chief Executive Officer, as an organization under the Corporate Management Committee, the Internal Controls Committee establishes a basic policy related to the internal control system while developing, maintaining, and improving the effectiveness of the integrated management system.
・ Compliance Committee As an organization under the Internal Controls Committee, this committee, with an attorney at law from outside Mitsui participating as an observer, develops, maintains, and improves the effectiveness of the compliance structure.
・ Disclosure Committee As an organization under the Internal Controls Committee, this committee develops principles and basic policy for statutory disclosure and timely disclosure as well as the internal structure, and discusses and determines the materiality and appropriateness of information to be disclosed.
・ J-SOX Committee As an organization under the Internal Controls Committee, this committee develops, maintains, and improves the effectiveness of the system for ensuring the reliability of our consolidated financial reporting. During the year ended March 31, 2012, due to the termination of the registration with SEC, the SOA Sec. 404 Committee was renamed as the J- SOX Committee.
・ Portfolio Management Committee As an advisory body to the Corporate Management Committee, this committee establishes the corporate portfolio strategy as well as investment and loan plans, monitors our corporate portfolios, and examines important individual proposals.
・ Information Strategy Committee As an advisory body to the Corporate Management Committee, this committee plans company-wide information strategy and determines and monitors essential policies concerning establishment of a management platform and promotion of the structure of the information strategy.
・ Sustainability Committee We have newly established the Sustainability Committee from May 2017 by strengthening and enhancing the role of the CSR Promotion Committee. As an organization under the Corporate Management Committee, this committee aims to promote management with greater awareness of the sustainability of both society and Mitsui and provides advice to the management.
・ Diversity Promotion Committee As an advisory body to the Corporate Management Committee, this committee makes proposals regarding basic policy and the plan for diversity promotion, and formulates and implements targets set along with the plan.
・ Crisis Management Headquarters As an extraordinary and non-permanent organization under the direct rule of the President and Chief Executive Officer, the Crisis Management Headquarters exercises necessary decision making in place of normal in-house decision mechanisms relating to all conceivable matters requiring an extraordinary response. The President and Chief Executive Officer serves as head of this Headquarters.
87 ・ Business Innovation Committee As an organization under the Corporate Management Committee, this committee monitors and analyzes new technology trends and potential business innovations, specifies our priorities and focuses, and provides advice to the management, as well as examines specific measures to support business units in implementing potential new businesses, aiming for the next generation.
Overview of our corporate governance and internal control framework is as follows:
3) The Relationship with External Directors and External Audit & Supervisory Board Members and Their Activities
ⅰ) Relationship with External Directors and reasons for their appointments; policy regarding their independence
- The prospective person’s extensive business experience and knowledge is required to deliberate on such board meeting proposals as investments and loans, and knowledge of his or her particular area of business should be used.
- Mitsui puts great value on ensuring independence of the External Directors from Mitsui in the pursuit of their management oversight functions. Also, with a view to overseeing business operations in a way that reflects the standpoint of our diverse stakeholders, in selecting External Directors, Mitsui shall take into consideration the fields from which candidates originate, along with their gender.
Given that Mitsui is a general trading company with extensive business dealings, it has been decided to make appropriate efforts by the Board of Directors to handle likely conflicts of interest involving the prospective External Directors in individual transactions with external parties.
The five External Directors that were appointed at the Ordinary General Meeting of Shareholders held on June 21, 2018, their relationships with Mitsui, and the reasons for their appointment are as follows. Regarding shareholdings of External Audit & Supervisory Board Members, see “4. Corporate Information, 5. Members of the Board of Directors and Audit & Supervisory Board Members.”
88 Name Reasons for appointment as (Date of assumption of Relationship with Mitsui External Director at Mitsui office) Mr. Muto has deep insight into fiscal and monetary affairs, as well as in economics in general, gained at the Ministry of Finance and the Bank of Japan. At the Board of Directors meetings, he uses his specialist knowledge to speak out actively, making a significant contribution to deepening the discussion. In the year There is no special interest between Mr. Muto ended March 31, 2018, he served as the committee Toshiro Muto and Mitsui, therefore, Mr. Muto is deemed to chair of the Remuneration Committee and a member of (Since June 2010) appropriately carry out his duties as the the Governance Committee, contributing to the study, independent and neutral External Director. revision and so forth of the remuneration system for Directors, which helped to further strengthen Mitsui’s corporate governance. Mr. Muto has deep insight into fiscal and monetary affairs as well as knowledge of corporate governance. Mitsui has reappointed him as an External Director so that he may continue to advise and supervise Mitsui’s management.
Ms. Kobayashi has advanced expertise in organizational management and risk management for generating innovation, which she has accumulated Mitsui paid membership fees and made donations through her experience working as the representative to the Japan Association of Corporate of private sector financial institutions and a multilateral Executives, where Ms. Kobayashi has served as development bank. She speaks out actively from Vice Chairperson since April 2015, but the diverse perspectives at the Board of Directors yearly amount paid in each of the last three fiscal meetings, making a significant contribution to years was below the standard amount for deepening the discussion. In the year ended March 31, donations and aid funds (¥10 million) established 2017, she served as a member of the Governance Izumi Kobayashi by Mitsui’s criteria of independence for External Committee and the Remuneration Committee, actively (Since June 2014) Officers. From the above, Mitsui has determined stating her opinions on the building of a highly that there is nothing that would affect the transparent governance system. During the year ended independence of Ms. Kobayashi as External March 31, 2018, Ms. Kobayashi served as a member of Director. Other than the above, there is no special the Remuneration Committee and exercised strong interest between Ms. Kobayashi and Mitsui, leadership as chair of the Nomination Committee in therefore, Ms. Kobayashi is deemed to examining the composition of the Board of Directors, appropriately carry out her duties as the the selection process for Directors and Managing independent and neutral External Director. Officers, and related matters. In view of these points Mitsui has reappointed her as an External Director so that she may continue to advise and supervise Mitsui’s management.
89
Name Reasons for appointment as (Date of assumption of Relationship with Mitsui External Director at Mitsui office) Ms. Rogers has a global perspective and advanced expertise in risk management cultivated through her experience working for international financial institutions and her experience in legal work as an in- house counsel. She makes many useful comments concerning risk control at the Board of Directors There is no special interest between Ms. Rogers meetings, making a significant contribution to Jenifer Rogers and Mitsui, therefore, Ms. Rogers is deemed to enhancing the supervision function of the Board of (Since June 2015) appropriately carry out her duties as the Directors. Since the year ended March 31, 2016, she independent and neutral External Director. has served as a member of the Governance Committee, actively stating her opinions on the building of a highly transparent governance system. In view of these points Mitsui has reappointed her as an External Director so that she may continue to advise and supervise Mitsui’s management.
Until March 2017, Mitsui paid advisory remuneration and training costs related to human resource development to t-lab Co., Ltd., where Mr. Takeuchi has served as a Director since June 2013, but the yearly amount paid in each of the last three fiscal years was below the standard amount for remuneration (¥10 million) paid to consultants and other individuals providing professional services established by the Mitsui’s Criteria of Independence for External Officers. Moreover, Mitsui pays donations, outsourcing Mr. Takeuchi has deep insight related to management fees related to human resource development, and gained as an expert in international corporate strategy. academic fees for trainees to the Harvard At the Board of Directors meetings, he makes thought- Business School, where Mr. Takeuchi has been a provoking proposals about Mitsui’s management professor since July 2010; however, the yearly strategies, making a significant contribution to amount of the Mitsui’s donations made in each of enhancing the supervision function of the Board of the last three (3) fiscal years was below the Hirotaka Takeuchi Directors. Since the year ended March 31, 2017, he has standard amount for donations and aid funds (\10 (Since June 2016) served as a member of the Nomination Committee, million) established by Mitsui’s Criteria of helping to improve the transparency of Mitsui’s Independence for External Officers, and the officers nominations. Mr. Takeuchi has deep insight yearly amount paid by Mitsui including into corporate strategy as well as knowledge of donations is less than 1% of the annual revenue corporate governance. Mitsui has reappointed him as of the Harvard Business School. From the above, an External Director so that he may continue to advise Mitsui has determined that there is nothing that and supervise Mitsui’s management. would affect the independence of Mr. Takeuchi as External Director. Although a nephew (third degree of kinship) of Mr. Takeuchi is an employee of Mitsui (managerial post), the individual is not subject to Mitsui’s standards set for Criteria of Independence for External Officers (relative within the second degree of kinship), nor is the individual deemed an important executing person given that the individual’s position is not equivalent to or above that of an officer-general manager class position.
90 Name Reasons for appointment as (Date of assumption of Relationship with Mitsui External Director at Mitsui office) Mr. Walsh has global expertise and excellent management skills cultivated through his long years working in upper management within the automobile industry and as chief executive officer of an Mitsui’s consolidated subsidiary sells iron and international mining and resources company. At the steel products to Rio Tinto Limited, at which Mr. Board of Directors meetings, he makes proposals and Walsh served as CEO until July 2016; however, suggestions from a broad-minded standpoint based on the yearly amount of sales in each of the last his experience of managing a global company, and three fiscal years is less than 0.1% of Mitsui’s makes significant contributions to active discussions at annual consolidated transaction volume. From Samuel Walsh the meetings of the Board of Directors, and to the above, Mitsui has determined that there is (Since June 2017) improving the effectiveness of said meetings. During nothing that would affect the independence of the year ended March 31, 2018, Mr. Walsh served as a Mr. Walsh as External Director. Other than the member of the Governance Committee and actively above, there is no special interest between Mr. provided his opinion on building of a highly Walsh and Mitsui, therefore, Mr. Walsh is transparent governance system. He has diverse deemed to appropriately carry out his duties as perspectives based on global corporate management the independent and neutral External Director. experience and expertise and knowledge related to capital policy and business investment. Mitsui has selected him as an External Director so that he may continue to advise and supervise Mitsui’s management.
(*) As of the time of issuance of this report, concurrent positions in other organizations held by External Directors are mainly as follows: Name Concurrent positions in other organizations held by External Directors Chairman of the Institute, Daiwa Institute of Research Ltd. Toshiro Muto Director General / CEO, The Tokyo Organising Committee of the Olympic and Paralympic Games External Director, ANA HOLDINGS INC. Izumi Kobayashi Governor, Japan Broadcasting Corporation External Director, Mizuho Financial Group, Inc. Jenifer Rogers General Counsel Asia, Asurion Japan Holdings G.K. Professor Emeritus, Hitotsubashi University Professor, Harvard Business School Hirotaka Takeuchi External Director, Daiwa Securities Group Inc. External Director, BrightPath Biotherapeutics Co., Ltd.
91 ⅱ) Activities of External Directors in the year ended March 31, 2018
The activities of External Directors in the year ended March 31, 2018 were as follows: Name Major activities Mr. Muto participated in 13 of the 15 Board of Directors meetings held during the year ended March 31, 2018, and used his deep insight into fiscal and monetary affairs, as well as in economics in general, gained at the Ministry of Finance and the Bank of Japan, to speak out actively, making a significant Toshiro Muto contribution to deepening the discussion.. In the year ended March 31, 2018, as chair of the Remuneration Committee and the Governance Committee, he contributed to the discussions and revision related to a remuneration system for officers that would lead to further enhancement of governance, etc.
Ms. Kobayashi participated in all 15 Board of Directors meetings held during the year ended March 31, 2018, and used her deep insight related to organization management that produces innovation, and risk management, gained from her experience serving as a representative of private sector financial institutions and a multilateral development bank, to speak out actively from diverse perspectives, making a significant contribution to deepening the discussion. In the year ended March 31, 2017, she Izumi Kobayashi served as a member of the Governance Committee and the Remuneration Committee, actively stating her opinions on building of a highly transparent governance system. In the year ended March 31, 2018, she served as a member of the Remuneration Committee and chair of the Nomination Committee, and exercised strong leadership in conducting reviews particularly regarding the composition of the Board of Directors and processes for selecting Directors and Managing Officers
Ms. Rogers participated in all 15 Board of Directors meetings held during the year ended March 31, 2018, and made many useful comments concerning risk control from her global perspective and based on her deep insight related to risk management gained from her work experience at international Jenifer Rogers financial institutions and experience in legal operations as a corporate attorney, making a significant contribution to enhancing the supervision function of the Board of Directors. Since the year ended March 31, 2016, she has served as a member of the Governance Committee, and actively provided her opinion with the aim of creating a highly transparent governance system.
Mr. Takeuchi has participated in 14 of the 15 Board of Directors meetings held during the year ended March 31, 2018, and made thought-provoking proposals about the Mitsui’s management strategies from the perspective of his deep insight related to management gained as an expert in international Hirotaka Takeuchi corporate strategy, making a significant contribution to enhancing the supervision function of the Board of Directors. Since the year ended March 31, 2017, he has served as a member of the Nomination Committee, and contributed to guaranteeing the transparency of the Mitsui’s nomination of officers.
Mr. Walsh has participated in all 11 Board of Directors meetings held since he became a Director in June 2017, and offered proposals and suggestions from a broad-minded standpoint based on his global expertise and his experience as a manager of global companies cultivated through his long years working in upper management within the automobile industry and as chief executive officer of an Samuel Walsh international mining and resources company, making significant contributions to active discussions at the meetings of the Board of Directors, and to improving the effectiveness of said meetings. In the year ended March 31, 2018, he served as a member of the Governance Committee, actively stating his opinions on building of a highly transparent governance system.
92 ⅲ) Relationship with External Audit & Supervisory Board Members and reasons for their appointments; policy regarding their independence
The External Audit & Supervisory Board Members shall be elected with the objective of further heightening the neutrality and independence of the auditing system, and, in particular, it is expected that the External Audit & Supervisory Board Members will give an objective voice to their auditing opinions from the standpoint of neutrality, building on such factors as independence. When selecting candidates for External Audit & Supervisory Board Members, the Audit & Supervisory Board has confirmed that no issues with independence arose by taking into consideration such factors as relations with the company, management and important staff members. As to the three External Audit & Supervisory Board Members as of the issuance of this report, the reasons for their appointment are as follows. Regarding shareholdings of External Audit & Supervisory Board Members, see 4. Corporate Information, 5. “Members of the Board of Directors and Audit & Supervisory Board Members.”
Name Reasons for appointment as External Audit & (Date of assumption of Relationship with Mitsui Supervisory Board Member at Mitsui office) Ms. Matsuyama is appointed as an External Audit & There is no personal, capital, business or other Supervisory Board Member in expectation of the relationship between Ms. Matsuyama and Mitsui, expression of her objective audit opinions from an Haruka Matsuyama therefore, Ms. Matsuyama is deemed to independent and neutral standpoint, with advanced (Since June 2014) appropriately carry out her duties as the independent insight into corporate governance and risk and neutral External Audit & Supervisory Board management cultivated through her many years of Member. experience in legal affairs as a judge and as an attorney at law.
Mr. Ozu is appointed as an External Audit & There is no personal, capital, business or other Supervisory Board Member in expectation of the relationship between Mr. Ozu and Mitsui, therefore, Hiroshi Ozu expression of his objective audit opinions from an Mr. Ozu is deemed to appropriately carry out his (Since June 2015) independent and neutral standpoint, from the many duties as the independent and neutral External Audit years of experience and perspective he has gained, & Supervisory Board Member. mainly as a prosecutor.
Although Mitsui paid market research fees and so forth exceeding ¥10 million in the most recent business year to Deloitte Tohmatsu Consulting LLC, at which Mr. Mori’s eldest son was an employee until April 2017, the relevant amount of payment was less than 0.1% of Deloitte Tohmatsu Consulting LLC’s annual sales; moreover, Mr. Mr. Mori is appointed as an External Audit & Mori’s eldest son was in a non-managerial role, and Supervisory Board Member because Mitsui deems was not involved in duties consigned by Mitsui; as him capable of clearly expressing an opinion as Kimitaka Mori such, Mr. Mori’s eldest son corresponds to a “one External Audit & Supervisory Board Member from (Since June 2017) who is not important” defined under the Mitsui’s a neutral and objective perspective based on his Criteria of Independence. From the above, Mitsui advanced expertise in corporate accounting has determined that there is nothing that would cultivated through his many years of experience as a affect the independence of Mr. Mori for External certified public accountant. Audit & Supervisory Board Member. Other than the above, there is no special interest between Mr. Mori and Mitsui, therefore, Mr. Mori is deemed to appropriately carry out his duties as the independent and neutral External Audit & Supervisory Board Member.
93 (*) As of the time of issuance of this report, concurrent positions in other organizations held by Audit & Supervisory Board Members are mainly as follows: Name Concurrent positions held in other organizations Attorney at Law External Director, T&D Holdings, Inc. Haruka Matsuyama External Director, Mitsubishi UFJ Financial Group, Inc. External Director, VITEC HOLDINGS CO., LTD. Attorney at Law Hiroshi Ozu External Audit & Supervisory Board Member, TOYOTA MOTOR CORPORATION External Audit & Supervisory Board Member, Shiseido Company, Limited Certified Public Accountant External Director, Japan Exchange Group, Inc. Kimitaka Mori External Audit & Supervisory Board Member, East Japan Railway Company External Director, Sumitomo Life Insurance Company
ⅳ) Activities of External Audit & Supervisory Board Members in the year ended March 31, 2018
The activities of External Audit & Supervisory Board Members in the year ended March 31, 2018 were as follows: Name Major activities Ms. Matsuyama participated in all 15 Board of Directors meetings, and all 21 Audit & Supervisory Board meetings, held during the year ended March 31, 2018. She offered advice and expressed Haruka Matsuyama opinions from the perspective of her knowledge and experience gained as a judge and an attorney at law. Also, as a member of the Governance Committee, she actively provided opinions that contributed to developing transparent and objective governance.
Mr. Ozu participated in all 15 Board of Directors meetings, and all 21 Audit & Supervisory Board meetings, held during the year ended March 31, 2018. He offered advice and expressed opinions from Hiroshi Ozu the perspective of his knowledge and experience gained as a public prosecutor and an attorney at law. Also, as a member of the Nomination Committee, he contributed to enhancement in the transparency of the Company’s nomination of officers.
Mr. Mori participated in 10 of the 11 Board of Directors meetings, and 15 of 16 Audit & Supervisory Board meetings, held since he became an Audit & Supervisory Board Member in June 2017. He Kimitaka Mori offered advice and expressed opinions from the perspective of his knowledge and experience gained as a certified public accountant. Also, as a member of the Remuneration Committee, he contributed to the discussions and revision related to an objective remuneration system for officers.
ⅴ) Criteria of independence for external officers (Directors/Audit & Supervisory Board Members)
External Directors or External Audit & Supervisory Board Members of Mitsui who do not fall under any of the following items are to be judged to have independence. (1) Person who is currently or was in the past ten years an executive director, executive officer, managing officer, manager, employee, administrative officer, etc. (hereinafter referred to as “executing person”) of Mitsui or Mitsui’s consolidated subsidiaries (2) Person or the executing person of a corporation holding either directly or indirectly 10% or more of total number of the voting rights of Mitsui (3) Person whose major business partner is Mitsui or Mitsui’s consolidated subsidiaries (*1) or the executing person of the same *1 If the relevant business partner received from Mitsui or Mitsui’s consolidated subsidiary the payment equivalent to 5% or more of its annual transaction volume (non-consolidated) in the most recent fiscal year or the relevant business partner obtained from Mitsui or Mitsui’s consolidated subsidiary the money loans equivalent to 5% or more of its consolidated total assets in the most recent fiscal year, the relevant business partner is deemed to be the person whose major business partner is Mitsui or Mitsui’s consolidated subsidiary. (4) Major business partner of Mitsui or Mitsui’s consolidated subsidiary (*2) or the executing person of the same
94 *2 If Mitsui or Mitsui’s consolidated subsidiary received from the relevant business partner the payment equivalent to 2% or more of Mitsui’s annual consolidated transaction volume in the most recent fiscal year or the relevant business partner provided Mitsui or Mitsui’s consolidated subsidiary with the money loans equivalent to 2% or more of Mitsui’s consolidated total assets, the relevant business partner is deemed to be the major business partner of Mitsui or Mitsui’s consolidated subsidiary. (5) Independent Auditor of Mitsui or Mitsui’s consolidated subsidiary or employee, etc. of the same (6) Person providing professional services such as consultant, lawyer and certified public accountant who received from Mitsui monetary payment or other property benefits exceeding ¥10 million in total other than officer remuneration in the most recent fiscal year (referring to the person belonging to the organization if the one who received the relevant property is an organization such as corporation and association) (7) Person or the executing person of a corporation who received an annual total of ¥10 million or more of donations or aid funds from Mitsui or Mitsui’s consolidated subsidiary in the most recent fiscal year (8) Person who has fallen under any of (2) to (7) above in the past three years (9) Spouse or relative within the second degree of kinship (hereinafter referred to as “close relatives”) of the person who is currently or has been recently the important executing person of Mitsui or Mitsui’s consolidated subsidiary (including Director who is not the executing person in the case of External Audit & Supervisory Board Member) (10) Close relatives of the person who currently falls or has fallen recently under any of (2) to (7) above (excluding the one who is not important)
ⅵ) Support for external members
For External Directors, before regular and extraordinary meetings of the Board of Directors, materials on the proposals are provided and advance explanations are given. For External Audit & Supervisory Board Members, in addition to timely provision of company information by the Full-time Audit & Supervisory Board Members and staff in the Audit & Supervisory Board Member Division, summaries of meetings between Full-time Audit & Supervisory Board Members and staff in the Audit & Supervisory Board Member Division are provided periodically. When necessary, advance distribution of materials and advance explanations are conducted regarding regular and extraordinary meetings of the Audit & Supervisory Board and of the Board of Directors. For external members, Mitsui provides personal computers (hereinafter referred to as the “officer PCs”) and distributes materials for meetings of the Board of Directors in a timely manner via email, thereby ensuring the time to review agendas. Mitsui sets up a Board of Directors’ database for use in storing information such as minutes and other materials of past meetings of the Board of Directors, and maintains a platform that enables access to such database from the officer PCs.
ⅶ) Policy on training for Directors and Audit & Supervisory Board Members
Upon assumption, opportunities are given to Directors and Audit & Supervisory Board Members for gaining full understanding of the business, financial affairs, organization, etc. of the company, the Companies Act of Japan and related laws and regulations, corporate governance and internal control to ensure that they may fulfil their duties including the respective roles expected of Directors or Audit & Supervisory Board Members which are mandated by the shareholders (fiduciary responsibility) and each legal responsibility. Furthermore, opportunities are given for keeping them up to date as necessary.
4) Status of Internal Control System
In the construction of internal control processes, aiming to achieve the above mentioned objective of the internal control process －“Improvement of effectiveness and efficiency of operations,” “Compliance with accounting standards and securing reliability of financial reporting,” “Compliance with laws, rules that are equivalent to the laws, and observance of management philosophy and company rules including all codes of conduct which reflect this philosophy,” and “The conservation of company assets”－the following systems are implemented.
ⅰ) Risk management system
As a general trading company engaging in a wide variety of businesses, risks arising from business activities are monitored and managed by Chief Operating Officers of business units and regional business units within their authorization delegated from
95 the management. Risks associated with our business include quantitative risks such as credit risk, market risk, business risk arising from subsidiaries’ businesses, and country risk, as well as qualitative risks such as compliance risk and operational risk. Measures taken by each business unit to manage quantitative risks include setting of position limits and loss-cut limits as well as monitoring of positions by divisions with relevant expertise. For the management of qualitative risks, the business units are obligated to observe related internal regulations. When a business unit or a regional business unit takes risks greater than the scope of authority granted to the Chief Operating Officers, it is necessary to obtain approval of the Corporate Management Committee or a Representative Director in charge, or a Senior Managing Officer in charge, depending on the importance of the case, in accordance with the standards of the internal approval system.
Furthermore, as stated in “2) Corporate Governance Structure of Mitsui,” as committees responsible for business execution and the internal control system, organizations such as the Portfolio Management Committee, the Internal Controls Committee, the Sustainability Committee, and the Crisis Management Headquarters establish and develop the risk management structures and handle significant risks. These committees consist of Managing Officers and the General Managers of Corporate Staff Units. With respect to the risks in the fields they are in charge of, each division of the Corporate Staff Units is responsible for surveillance of the whole Company’s positions, control within the prescribed range of their authority, and supporting the relevant Directors and Managing Officers.
ⅱ) Internal control over financial reporting
As a result of the termination of the SEC registration, Mitsui has implemented the internal control framework as stipulated in the Financial Instruments and Exchange Act of Japan from the year ended March 2012. In addition to the Company-wide discipline, Mitsui has been conducting self-assessment by units subject to evaluation and testing by an independent division concerning the effectiveness of accounting and financial closing controls, IT controls, and business process level controls. After comprehensively assessing the above, Mitsui management confirmed that internal control over financial reporting is effective for the year ended March 31, 2018.
ⅲ) Internal controls regarding construction and management of information systems and information security
“Information Technology (IT) policy” is declared as a basic policy for IT utilization to promote further awareness raising of employees and enhancement of IT governance. The important principles for our global group information strategy are formulated in line with the corporate management policy through the discussions at the Information Strategy Committee established pursuant to the “Rules of Information Strategy Committee.” Under the system centered around the Information Strategy Committee, we are enhancing the system of internal control including management of various possible risks such as information leakage risks through maintenance of the following rules, necessary in light of development and operation of information systems and information security. “Rules on Information System Management”: rules on the process of procurement, introduction and operation of information assets “Rules on IT Security”: code of conduct for the system supervisory divisions regarding IT security “Rules on Information Management”: basic policies in terms of information risk management system and information management “Rules on Protection of Personal Information”: Information”: rules for the handling of personal information required for business execution (Applied only in Japan) “Rules on Cyber Security Countermeasures”: rules for preventive measures against cyber-attacks and emergency countermeasures in the event of incident
ⅳ) Compliance structure
In addition to the Compliance Committee (see “2) Corporate Governance Structure of Mitsui”), chaired by the Chief Compliance Officer, Mitsui implements a compliance management system within the regular line of management at business division and department level. Further, Compliance Supervising Officers are designated at domestic and overseas units, branch offices and others.
Mitsui has set forth the “Business Conduct Guidelines for Employees and Officers of Mitsui & Co., Ltd.” (“Guidelines”) and has equivalent business conduct guidelines in place at its subsidiaries. Mitsui is striving to improve observance of the
96 Guidelines through continuous monitoring and review. See Mitsui’s website for the “Business Conduct Guidelines for Employees and Officers of Mitsui & Co., Ltd.”
Mitsui has a total of eight whistle-blowing avenues in place, including those involving an external attorney at law and a third- party providing hotline services. Pursuant to the Whistleblower Protection Act, Mitsui made it clear that a whistle-blower would not be subject to any recrimination or detrimental treatment by Mitsui as a result of whistle-blowing. Additionally, Mitsui makes sure that its domestic affiliated companies are also able to use the whistle-blowing avenues (external attorneys at law and a third-party providing hotline services) designated by Mitsui in order to (i) maintain a high standard of confidentiality and (ii) enable their employees to use these avenue without uneasiness. Mitsui’s overseas offices and overseas affiliate companies also have whistle-blowing systems that were put in place considering applicable local laws and regional characteristics. Furthermore, Mitsui prohibits treating a whistleblower disadvantageously due to the reason of the whistleblowing itself, and will thoroughly make this a known internal fact. Any cases of violation of compliance are handled strictly, including disciplinary actions in accordance with the Employment Regulations of Mitsui & Co., Ltd.
ⅴ) Specially Designated Business Management System
In response to the DPF Incident, Mitsui established the “Specially Designated Business Management System” in April 2005. Under this system, internal review of four business domains which are “Environment-related business,” “Medical, Healthcare and Bioethics-related businesses,” “Businesses with subsidy,” and “Business harboring other unusual reputation risks” is strengthened. When examining these matters, reports from the Sustainability Committee or the Environmental Societal Advisory Committee in which external experts participate as members, or opinions from other external experts will be obtained, as necessary. In addition, Mitsui appoints consultants with insights into environmental and social risk, human rights and utilize their advice for new and existing environment-related businesses as necessary.
ⅵ) Systems to secure appropriateness of operations within the corporate group
In March 2006, Mitsui established the “Mitsui & Co., Ltd. Corporate Governance and Internal Control Principles” (“Principles”). In light of other laws and regulations and to the extent reasonable, Mitsui requires its subsidiaries to develop and operate internal controls based on these Principles, and for its equity accounted investees, Mitsui coordinates with other equity participants and encourages the equity accounted investees to develop and operate similar internal controls. For internal controls to secure reliability in financial reporting, see “internal control over financial reporting” above. In addition, from its officers and employees, Mitsui appoints supervising officers for its affiliated companies and has them engage in their duties based on the “Rules on Delegation of Authority for Supervising Officers for Affiliated Companies.” Also, when Mitsui deploys full-time audit & supervisory board members in major affiliated companies, Mitsui selects personnel from the Internal Auditing Division rather than from related Business Units to enhance the independence of auditing.
5) Enhancements of Corporate Governance in the year ended March 31, 2018
ⅰ) Implementation for strengthening corporate governance Implementation for strengthening corporate governance during the year ended March 31, 2018 is as follows:
(a) Evaluation of effectiveness of the Board of Directors
The methods and results of the evaluation of effectiveness of the Board of Directors for the year ended March 31, 2018 are summarized as follows:
＜Evaluation method＞ In January 2018, questionnaires pertaining to matters such as the composition of the Board of Directors, its operational status, and individual responsibilities were distributed to fourteen Directors and five Audit & Supervisory Board Members (hereinafter referred to as the “2018 questionnaire”), who all subsequently completed and returned the questionnaires. Moreover, opinions were exchanged regarding the effectiveness of the Board of Director in meetings attended by all External Directors and External Audit & Supervisory Board Members (hereinafter referred to as the “external member meetings”) held in February 2018. In its meeting held in February 2018, the Governance Committee engaged in discussions on the basis of the results of the 2018 questionnaire and external member meetings, and then the Board of
97 Directors, after discussing such matters while taking the committee’s report into account, decided on the matter of evaluating its effectiveness for the year ended March 31, 2018 in its meeting held in March. With respect to carrying out the above evaluation method, at a Governance Committee meeting held in November 2017, the decision was made, as the current format’s effectiveness was recognized, to persist with the current self-evaluation format involving the evaluation of effectiveness of the Board of Directors for the year ended March 31, 2018, upon having verified the adequacy of processes that encompass methods of evaluating the effectiveness of the Board of Directors carried out by a third party.
＜Questionnaire items＞ Major categories of questionnaire items of the 2018 questionnaire are listed below. The 2018 questionnaire contains fields for comments related to such categories, and has been evaluated using methodology that involves assigning one of five grades to each question in the major categories. Furthermore, evaluation also encompasses the extent to which effectiveness of the Board of Directors has improved in comparison with the previous year, in order to gain an understanding of progress achieved in that regard. I. Matters relating to composition of the Board of Directors II. Matters relating to the operational status of the Board of Directors III. Matters relating to deliberations of the Board of Directors IV. Matters relating to roles and duties of the Board of Directors V. Matters relating to advisory committee member composition, establishing meeting topics, reporting discussion results to the Board of Directors, other matters regarding status of committee management, etc. VI. Matters relating to execution of duties of the Directors and Audit & Supervisory Board Members themselves VII. Matters relating to support, etc. for Directors and Audit & Supervisory Board Members VIII.Overall comments
＜Initiatives in the year ended March 31, 2018 geared to achieving greater effectiveness＞ During the year ended March 31, 2018, the Board of Directors and the Board of Directors Secretariat have engaged in the following initiatives taking into account results of the evaluation of effectiveness of the Board of Directors for the previous year. The Governance Committee also held meetings in July and November 2017, where committee members confirmed, reported and otherwise took action with respect to challenges of improving effectiveness and the status of initiatives geared to resolving issues.
- Topics for the Board of Directors to discuss During the year ended March 31, 2018, the Board of Directors engaged in deliberations regarding business plans for the fiscal year, given the notion that more opportunities should be arranged for discussing the Company’s overall direction on matters such as corporate strategy and the Medium-term Management Plan. The Board of Directors also engaged in deliberations with respect to the new Medium-term Management Plan, subsequent to deliberations of the external member meetings. Moreover at the external member meetings, opportunities were arranged to discuss topics that included “matters of concern regarding the capital market, and the Company’s IR activities” and “the Company’s digital transformation.". A significant majority of the external members responding to the 2018 questionnaire provided favorable assessment concerning the matter of discussions regarding the Company’s overall direction at meetings of the Board of Directors, and a majority of the respondents overall feel the situation has improved in comparison with the previous year.
- Composition of the Board of Directors During the year ended March 31, 2018, the Company achieved improvements with respect to striking a balance in diversifying the composition of its Board of Directors, having appointed Director Walsh who has experience being the CEO of a global corporation and Audit & Supervisory Board Member Mori who has expertise in accounting and auditing. A significant majority of the external members responding to the 2018 questionnaire provided favorable assessment concerning the composition of the Board of Directors, and a majority of the respondents overall feel the situation has improved in comparison with the previous year.
- Review of operations of the Board of Directors
98 With respect to matters that are to be referred and reported to the Board of Directors, beginning in the year ended March 31, 2018, materials for meetings of the Board of Directors now clearly state points that are to be discussed up to the stage of referral and reporting to the Board of Directors, including bodies such as the Council on Individual Proposals and the Corporate Management Committee. The materials for meetings of the Board of Directors now contain content that is appropriate with respect to deliberating on such points, and tables listing major points of discussion, risks, and countermeasures in that regard. A significant majority of the external members responding to the 2018 questionnaire provided a favorable assessment concerning the notion that there is greater clarity with respect to points of internal Company discussion which have been the basis of discussions of the Board of Directors, and a majority of the respondents overall feel the situation has improved in comparison with the previous year.
＜Summary of evaluation results＞ Taking the aforementioned initiatives into account, the Company has reviewed the results of the 2018 questionnaire, and outcomes of exchanges of opinion at the external member meetings and deliberations of the Governance Committee and the Board of Directors. Accordingly, with respect to effectiveness of the Board of Directors during the year ended March 31, 2018, the findings made by the Board of Directors are as follows:
- Many commented that improvement has been achieved in addressing the three challenges stated last year with respect to (1) discussion topics, (2) composition of the Board of Directors, and (3) revamping meeting management. - Meetings of the Board of Directors have been operating smoothly, underpinned by adequate support of the Board of Directors Secretariat in areas such as preparing materials for meetings of the Board of Directors, providing information, and scheduling. - The Board of Directors has been securing sufficient time for deliberations and engaging in constructive discussions and exchanges of opinion. - At meetings of the Board of Directors, reports are given on results of risk analysis from Company-wide and multiple angles, based on which the Board of Directors discusses and reviews such risks drawing on knowledge furnished by respective Directors and Audit & Supervisory Board Members. - The respective Directors and Audit & Supervisory Board Members, upon understanding the Board of Directors’ duty to carry out oversight and auditing of the management, have all been devoting sufficient time and effort in fulfilling their responsibilities as Directors or Audit & Supervisory Board Members from an objective standpoint separate from business execution. - The Company adequately ensures the availability of opportunities and funds for enabling Directors and Audit & Supervisory Board Members to acquire knowledge necessary to fulfill their roles and duties, and also on the whole the Company has ensured availability of frameworks for collaboration involving external members, the management, the Independent Auditor, and the Internal Auditing Division. Based on the details summarized above, the Company’s Board of Directors concludes that it has adequately maintained its effectiveness during the year ended March 31, 2018.
＜Future Initiatives geared to achieving greater effectiveness＞ - Composition of the Board of Directors With respect to composition of the Board of Directors, there was a diverse range of comments on matters such as the proportion of external members, the appropriate number of members, and securing appropriate Outside Directors. Taking such opinions into account, the Company’s Board of Directors will ceaselessly review options with respect to a membership composition that is adequately suited to how the Board of Directors is positioned within the governance framework chosen by the Company.
- Matters for deliberation by the Board of Directors With respect to matters for deliberation by the Board of Directors, consideration is being given to the matter of setting agenda appropriate for discussions involving external members. Moreover, some commented that opportunities for regular discussion should be arranged with respect to strategy, governance, compliance, cyber security and other Company-wide topics, and also with respect to agendas that take prevailing trends and current events into consideration. The Company’s Board of Directors will continue to review options with respect to adequately establishing matters for deliberation by the Board of Directors, from the perspective of enabling the Board of Directors to bring greater added value in terms of managing the Company.
99
- Method of deliberation by the Board of Directors With respect to method of deliberation by the Board of Directors, some commented that they would like opportunities for open discussion established. The Company’s Board of Directors will take these comments into account as it forges ahead in revamping Board of Director deliberation methods.
- Matters relating to the advisory committees to the Board of Directors With respect to matters relating to the advisory committees, some commented on the matters including regularly reporting details on deliberations of the respective advisory committees, as well as setting advisory committee schedules and frequencies of holding such meetings. The Company’s Board of Directors will take these comments into account as it considers the possibility of revamping the methods of managing the advisory committees to the Board of Directors.
The Company’s Board of Directors will aim to sustainably increase corporate value by engaging in ongoing initiatives geared to maintaining and enhancing the effectiveness of the Board of Directors including those initiatives involving the aforementioned points, and ensuring adequate oversight with respect to management by the Board of Directors.
(b) Other initiatives
- The status of meetings held in the year ended March 31, 2018 by the three Committees that are advisory bodies to the Board of Directors is as follows: ・ The Governance Committee was held three times in the year ended March 31, 2018 and carried out studying the state and future vision of Mitsui’s corporate governance while taking into consideration the viewpoint of the External Officers. ・ The Nomination Committee was held twice in the year ended March 31, 2018 and carried out establishing the selection standards and process to be applied in nominating Directors an Managing Officers and evaluating proposal of Director nomination. ・ The Remuneration Committee was held three times in the year ended March 31, 2018 and carried out a review of the remuneration system for Directors and Managing Officers, and evaluated compensation proposals.
- The External Members Meetings: ・ The External Members Meetings were held six times in the year ended March 31, 2018, where External Directors, External Audit & Supervisory Board Members, Internal Directors, Full-time Audit & Supervisory Board Members, Independent Auditors and Managing Officers exchanged information and opinions regarding matters such as the corporate management policy, audits and the operation of operating segments.
ⅱ) Measures for strengthening internal controls
The efforts made by the committees regarding execution of business activities and internal controls in the year ended March 31, 2018 are as follows:
- The Internal Controls Committee met twice. The three sub-committees to the Internal Controls Committee, which are the Compliance Committee, the Disclosure Committee and the J-SOX Committee, each made reports to the Internal Controls Committee regarding matters including the discussions they held.
- The Compliance Committee met in March 2018, and carried out a review of Mitsui’s responses to compliance issues and the compliance plans for the purpose of maintaining and improving the effectiveness of the compliance structure. In order to improve the awareness and knowledge of its officers and employees regarding compliance issues, Mitsui distributed the Handbook to all the employees, and implemented various compliance e-learning and compliance training sessions. In November 2017, Mitsui held the Compliance Review week as an opportunity to review familiar compliance issues, in which we held a seminar, exchanged opinions and information, and so on. The compliance awareness survey was also conducted at Mitsui and its main group companies located in Japan in order to see the awareness level of our group. Mitsui also worked on building a consolidated group-wide compliance structure by developing a compliance program at affiliated companies,
100 through provision of assistance to compliance officers of such companies, for example, by distributing “Compliance Handbook for Mitsui Group companies” to main group companies located in Japan. Furthermore, as a new initiative aimed at further strengthening detection and control, Mitsui began the introduction of the Global Group Hotline, a special whistle- blowing hotline for reporting and seeking advice regarding cases that breach the laws of Japan or another country regarding anti-trust (monopoly) laws or anti-corruption laws, or cases that give rise to suspicion of such breaches. Under the system that is being put in place, the Compliance Department belonging to Mitsui’s head office Legal Division becomes a unified channel by which to receive whistleblowing reports from officers and employees of overseas trading subsidiaries, and other subsidiaries in Japan and overseas.
- The Disclosure Committee met three times. The Committee established a disclosure policy for various disclosure materials and carried out evaluations of the appropriateness of the contents of such materials.
- The J-SOX Committee met twice. The Committee understood the company-wide status of internal control over financial reporting for the year ended March 31, 2018 and studied company-wide measures to keep and improve the effectiveness of internal control.
- The Portfolio Management Committee met eleven times. The Committee reported to the Corporate Management Committee regarding the results of examinations into business portfolio strategy, investments, loans and recycling plans, and individual large-scale investments, and carried out monitoring and analysis of important indices such as cash flows and risk assets.
- The Information Strategy Committee met six times. The Committee reviewed and discussed various initiatives such as Digital Transformation, current status of cyber security measures and of IT-BCP and measures to promote information sharing within the company, etc.
- The Sustainability Committee met four times. The Committee conducted proposals to the Corporate Management Committee regarding sustainability-related management policies and business activities, and reported the results and the plans of sustainability promotion activities and the Mitsui & Co., Ltd. Environment Fund.
- The Business Innovation Committee met six times. It not only focused on new technology trends and potential business innovations, but also promoted innovation such as reformation of business models, researched and identified company-wide priority items, shared such information internally, formed internal task forces, conducted awareness campaigns, and studied and deliberated on potential new business opportunities.
- The Diversity Promotion Committee met in September, 2017. The Committee discussed and analyzed current issues to realize our diversity management aims and made decisions regarding action plans such as Working Style Innovations in order to resolve these issues.
101 6) Other regulations in Mitsui’s Articles of Incorporation
ⅰ) Resolution requirements for appointment of Directors
Regarding resolutions for the appointment of Directors, our Articles of Incorporation set forth that attendance of shareholders who hold one-third or more of the voting rights of the shareholders who can exercise voting rights is necessary. The Articles of Incorporation also set forth that resolutions for the appointment of Directors may not be made with cumulative voting.
ⅱ) Decision-making body for buying back Company’s own shares
In order to enable the execution of a flexible and swift capital policy, the Articles of Incorporation set forth that Mitsui may acquire its own shares by means of a market transaction upon a resolution of the Board of Directors.
ⅲ) Requirements for special resolutions of the General Meeting of Shareholders
For smooth management of the General Meeting of the Shareholders, the Articles of Incorporation set forth that a resolution of the General Meeting of Shareholders as specified by Article 309, Paragraph 2 of the Companies Act of Japan is valid if the shareholders who have at least one-third of the total voting rights attend the meeting and of which two-thirds of the votes support such resolution.
ⅳ) Interim dividend
In order to enable profits to be returned to shareholders in a flexible and swift manner, the Articles of Incorporation set forth that Mitsui may pay interim dividends, upon a resolution by the Board of Directors, with September 30 set as the record date each year.
ⅴ) Limitation of liability of Directors and Audit & Supervisory Board Members
In order to enable Directors and Audit & Supervisory Board Members to fully carry out the role that is expected of them in the execution of their duties, the Articles of Incorporation set forth that, upon a resolution of the Board of Directors, the liability of Directors and Audit & Supervisory Board Members may be limited to the extent determined by the applicable laws and regulations.
7) Remuneration of Directors and Audit & Supervisory Board Members
ⅰ) The remuneration of Directors and Audit & Supervisory Board Members for the year ended March 31, 2018 was as follows: Number of Basic Stock Total Category of position Bonus recipients remuneration option remuneration Directors 11 ¥733 million ¥542 million ¥129 million ¥1,405 million (Excluding External Directors) Audit & Supervisory Board Members (Excluding External Audit & 2 ¥132 million － － ¥132 million Supervisory Board Members) External Directors and External Audit 10 ¥151 million － － ¥151 million & Supervisory Board Members Total 23 ¥1,016 million ¥542 million ¥129 million ¥1,688 million (Notes) 1. Bonuses shown above are not paid yet on the date of the issuance of this report. 2. In addition to the amounts shown above, Mitsui paid pensions (resolution for payments made prior to the abolition of such program) of ¥559 million to 119 retired Directors, and a total of ¥62 million to 17 retired Audit & Supervisory Board Members in the year ended March 31, 2018.
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ⅱ) The following table contains information about remuneration earned by the named directors who earned more than a total of ¥100 million for the year ended March 31, 2018. Category of Basic Stock Total Name Payer Bonus position remuneration option remuneration Masami Iijima Director Mitsui ¥114 million ¥83 million ¥30 million ¥227 million
Tatsuo Yasunaga Director Mitsui ¥131 million ¥83 million ¥36 million ¥250 million
Hiroyuki Kato Director Mitsui ¥76 million ¥58 million ¥8 million ¥142 million
Yoshihiro Hombo Director Mitsui ¥76 million ¥58 million ¥8 million ¥142 million
Makoto Suzuki Director Mitsui ¥76 million ¥58 million ¥8 million ¥142 million
Satoshi Tanaka Director Mitsui ¥57 million ¥58 million ¥19 million ¥134 million
Keigo Matsubara Director Mitsui ¥62 million ¥50 million ¥7 million ¥119 million
Shinsuke Fujii Director Mitsui ¥63 million ¥50 million ¥7 million ¥120 million
ⅲ) Taking into consideration the result of the deliberation at the Remuneration Committee, which is chaired by an External Director, the remuneration of Directors (excluding External Directors) is determined as a sum of fixed basic remuneration, performance-related bonus based on the key performance indicators, and stock-based compensation stock options with stock price conditions as medium- and long-term incentive compensation. Total amount of basic remuneration to be paid to the Directors shall not exceed ¥1 billion per year (Resolved at the General Meeting of Shareholders on June 21, 2017). Total amount of bonus to be paid to the Directors (excluding External Directors) shall not exceed ¥700 million per year (Resolved at the General Meeting of Shareholders on June 21, 2017). Total amount of stock option with stock price conditions to be paid to the Directors (excluding External Directors) shall not exceed ¥500 million per year (Resolved at the General Meeting of Shareholders on June 20, 2014). External Directors, who are separated from business execution, are not paid performance-related bonus and stock-based compensation stock options with stock price conditions. Directors are not paid retirement compensation.
(a) Total amount paid in bonuses for Directors
The performance-related bonus are calculated by the formula that is advised as appropriate by the Remuneration Committee and subsequently resolved at a Board of Directors meeting.
For fiscal year ended on March 31, 2018, total amount of bonus is calculated as follows: Total amount of bonus = (profit attributable to owners of the parent × 50% × 0.1%) + (core operating cash flow × 50% × 0.1%) However, the total amount shall not exceed ¥700 million. If the profit attributable to owners of the parent is minus, i.e. “net loss”, and/or core operating cash flow is minus, i.e. “cash outflow”, then such item is set as 0 for the calculation.
(b) Amount paid as individual bonuses
The total amount calculated by the method shown in (a) above is distributed to each Director in proportion to the following points, which are assigned for each position. Amounts less than ¥10,000 will be rounded off. (Amount individually paid = total amount of bonus × position points / sum of position points)
Points by position Executive Vice Senior Executive Executive Managing Chairman/President President Managing Officer Officer 10 7 6 5
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Based on the composition of the Directors as of the date of the issuance of this report, the maximum amounts that may be paid for each position (at the limit of the total bonus amount of ¥700 million) are as follows: Chairman/President = ¥700 million × 10 points / (10 points × 2 persons + 7 points × 3 persons = ¥111.11 million + 6 points × 2 persons + 5 points × 2 person = 63 points) Executive Vice President = ¥700 million × 7 / 63 points = ¥77.77 million Senior Executive Managing Officer = ¥700 million × 6 / 63 points = ¥66.66 million Executive Managing Officer = ¥700 million × 5 / 63 points = ¥55.55 million
(c) Conditions for exercise of subscription rights to shares
This stock option with stock price conditions is granted to the Company’s Directors (excluding External Directors) to purchase up to 500,000 shares of the Company’s common stock per year. The exercise period of subscription rights to shares shall be 27 years from the day following the date on which 3 years have elapsed after the allotment date of subscription rights to shares, with payment due upon the exercise of the subscription right to shares being ¥1 per share. See “1. Status on the Mitsui’s Shares, (2) Status of the Share Subscription Rights” for more detail.
ⅳ) Each Director (excluding External Directors) is required to purchase Mitsui’s shares in an amount equivalent to at least 10% of his or her monthly remuneration but less than ¥1 million through the Mitsui Executives’ Shareholding Association.
ⅴ) Audit & Supervisory Board Members receive only fixed basic remuneration which does not include a performance-related portion. The remuneration for each Audit & Supervisory Board Member is determined by discussions among the Audit & Supervisory Board Members. The total amount shall not exceed ¥240 million per year (Resolved at the General Meeting of Shareholders on June 21, 2017). Retirement compensation is not paid to the Audit & Supervisory Board Members.
8) Status of Stocks Held
ⅰ) Stocks for investment held for purposes other than pure investment purposes stood at 438 issues (including 147 listed issues). Total of the amount recorded in the balance sheet was ¥1,133,799 million as of March 31, 2018, and increased by ¥480,455 million from that as of March 31, 2017. This was mainly due to Vale stocks (¥388,377 million as of March 31, 2018) being newly classified as investment stocks.
ⅱ) Stocks for investment held for purposes other than pure investment purposes (excluding unlisted stocks), of which amount recorded on the balance sheet as of March 31, 2017 exceeded 1% of the common stock of Mitsui are as follows:
Specified Investment Shares (32 issues) Number of shares Amount on balance sheet Issue Purpose of holding (Shares) (Millions of Yen) Seek operating revenue and improvement in corporate value by strengthening relationship Seven & i Holdings Co., Ltd. 16,222,480 70,762 with issuer of stocks or making various proposals, etc. to issuer of stocks Recruit Holdings Co., Ltd. 9,000,000 51,120 same as above Sims Metal Management Ltd. 33,450,338 35,490 same as above Yamaha Motor Co., Ltd. 8,586,000 23,019 same as above MODEC, INC. 8,387,300 19,852 same as above NIPPON STEEL & SUMIKIN BUSSAN 3,383,100 15,832 same as above CORPORATION TOKYO BROADCASTING SYSTEM 7,691,000 15,289 same as above HOLDINGS, INC. HUTCHISON CHINA MEDITECH 3,214,404 14,645 same as above LIMITED
104 Number of shares Amount on balance sheet Issue Purpose of holding (Shares) (Millions of Yen) Toray Industries, Inc. 13,776,000 13,596 same as above Yamato Kogyo Co., Ltd. 4,573,000 13,133 same as above TPV Technology Limited 426,802,590 12,942 same as above Mitsui Chemicals, Inc. 17,370,390 9,553 same as above TOYOTA MOTOR CORPORATION 1,500,000 9,063 same as above KATO SANGYO Co., Ltd. 3,153,000 9,004 same as above J-OIL MILLS, INC. 2,087,711 8,768 same as above Mitsui Fudosan Co., Ltd. 3,000,000 7,122 same as above GOLDWIN INC. 1,091,876 6,387 same as above Dai-ichi Life Holdings, Inc. 3,163,900 6,316 same as above Nippon Steel & Sumitomo Metal 2,459,954 6,309 same as above Corporation NSK Ltd. 3,838,000 6,110 same as above PT Pelat Timah Nusantara Tbk 252,335,000 5,701 same as above Nippon Flour Mills Co., Ltd. 3,349,110 5,505 same as above MS & AD Insurance Group Holdings, Inc. 1,422,900 5,037 same as above DaikyoNishikawa Corporation 3,222,720 4,701 same as above Sumitomo Metal Mining Co., Ltd. 2,908,000 4,604 same as above Kaneka Corporation 5,543,459 4,589 same as above Showa Sangyo Co., Ltd. 7,700,000 4,527 same as above TOSOH CORPORATION 4,493,000 4,394 same as above Mitsui Engineering & Shipbuilding Co., 25,500,000 4,386 same as above Ltd. Nihon Unisys, Ltd. 2,448,509 3,721 same as above AIR WATER INC. 1,754,000 3,599 same as above Lion Corporation 1,759,000 3,521 same as above
Deemed Stockholdings (7 issues) Number of shares Amount on balance sheet Issue Rights held by Mitsui (Shares) (Millions of Yen) TOYOTA MOTOR CORPORATION 2,246,200 13,571 Voting rights Mitsui Chemicals, Inc. 17,370,000 9,553 same as above MS & AD Insurance Group Holdings, Inc. 2,030,100 7,186 same as above Mitsui Fudosan Co., Ltd. 2,801,000 6,649 same as above SKY Perfect JSAT Holdings Inc. 13,405,200 6,300 same as above Katakura Industries Co., Ltd. 3,600,000 5,014 same as above Toyo Suisan Kaisha, Ltd. 994,000 4,120 same as above (Note) In selection of high ranking issues in terms of the amount recorded on the balance sheet, Specified Investment Shares and Deemed Stockholdings are not combined.
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Stocks for investment held for purposes other than pure investment purposes (excluding unlisted stocks), of which amount recorded on the balance sheet as of March 31, 2018 exceeded 1% of the common stock of Mitsui are as follows:
Specified Investment Shares (38 issues) Number of shares Amount on balance sheet Issue Purpose of holding (Shares) (Millions of Yen) Seek operating revenue and improvement in corporate value by strengthening relationship Vale S.A. 286,347,055 388,377 with issuer of stocks or making various proposals, etc. to issuer of stocks Seven & i Holdings Co., Ltd. 16,222,480 74,039 same as above Recruit Holdings Co., Ltd. 27,000,000 71,401 same as above Sims Metal Management Ltd. 33,450,338 39,443 same as above NIPPON STEEL & SUMIKIN BUSSAN 5,078,770 29,913 same as above CORPORATION Yamaha Motor Co., Ltd. 8,586,000 27,303 same as above MODEC, INC. 8,387,300 22,301 same as above HUTCHISON CHINA MEDITECH 3,214,404 19,137 same as above LIMITED GOLDWIN INC. 1,091,876 13,932 same as above Toray Industries, Inc. 13,776,000 13,865 same as above Yamato Kogyo Co., Ltd. 4,573,000 13,499 same as above TOKYO BROADCASTING SYSTEM 5,746,000 12,968 same as above HOLDINGS, INC. KATO SANGYO Co., Ltd. 3,153,000 11,744 same as above Mitsui Chemicals, Inc. 3,474,078 11,655 same as above TOYOTA MOTOR CORPORATION 1,500,000 10,237 same as above PT Pelat Timah Nusantara Tbk 252,335,000 9,447 same as above Mitsui Fudosan Co., Ltd. 3,000,000 7,744 same as above J-OIL MILLS, INC. 2,087,711 7,578 same as above Sumitomo Metal Mining Co., Ltd. 1,454,000 6,513 same as above Kaneka Corporation 5,543,459 5,848 same as above Synlait Milk Ltd 9,011,849 5,807 same as above Nippon Steel & Sumitomo Metal 2,459,954 5,747 same as above Corporation DaikyoNishikawa Corporation 3,222,720 5,620 same as above Nihon Unisys, Ltd. 2,448,509 5,616 same as above TPV Technology Limited 426,802,590 5,604 same as above Nippon Flour Mills Co., Ltd. 3,349,110 5,522 same as above NSK Ltd. 3,838,000 5,472 same as above Tayca Corporation 1,784,094 5,024 same as above MS & AD Insurance Group Holdings, Inc. 1,422,900 4,773 same as above TOSOH CORPORATION 2,246,500 4,690 same as above Dai-ichi Life Holdings, Inc. 2,372,900 4,609 same as above Mitsui E&S Holdings Co., Ltd. 2,550,000 4,411 same as above Showa Sangyo Co., Ltd. 1,540,000 4,259 same as above Denka Company Limited 1,087,400 3,876 same as above Lion Corporation 1,759,000 3,769 same as above
106 Number of shares Amount on balance sheet Issue Purpose of holding (Shares) (Millions of Yen) AIR WATER INC. 1,754,000 3,641 same as above ZEON CORPORATION 2,352,000 3,617 same as above QIWI plc 1,715,403 3,482 same as above
Deemed Stockholdings (6 issues) Number of shares Amount on balance sheet Issue Rights held by Mitsui (Shares) (Millions of Yen) TOYOTA MOTOR CORPORATION 2,246,200 15,330 Voting rights Mitsui Chemicals, Inc. 3,474,000 11,655 same as above Mitsui Fudosan Co., Ltd. 2,801,000 7,230 same as above MS & AD Insurance Group Holdings, Inc. 2,030,100 6,810 same as above SKY Perfect JSAT Holdings Inc. 13,405,200 6,407 same as above Toyo Suisan Kaisha, Ltd. 994,000 4,100 same as above (Note) In selection of high ranking issues in terms of the amount recorded on the balance sheet, Specified Investment Shares and Deemed Stockholdings are not combined.
ⅲ) There are no stocks held solely for investment purposes.
(2) Details of Audit Fees and Other Matters
1) Details of fees paid to the certified public accountant auditor
Mitsui’s certified public accountant auditor is Deloitte Touche Tohmatsu LLC. The table below shows the amount of fees paid to Deloitte Touche Tohmatsu LLC by Mitsui and its consolidated subsidiaries, for the years ended March 31, 2018 and 2017.
Year ended March 31, 2018 Year ended March 31, 2017 Classification Audit Fees Non Audit Fees Audit Fees Non Audit Fees (Millions of Yen) (Millions of Yen) (Millions of Yen) (Millions of Yen) Mitsui 704 6 709 18 Consolidated subsidiaries 690 8 725 10 Total 1,394 14 1,434 28 (Note) Audit fees are fees for auditing pursuant to the Companies Act of Japan, the Financial Instruments and Exchange Act of Japan, and auditing the consolidated financial statements prepared in English. The audit fees include services performed as part of the audit, directly relating to the audit, and which are required by laws to be performed by the auditor, and can only be reasonably performed by the auditor.
2) Details of other significant fees
We entrust auditing work and non-auditing work to member firms of Deloitte Touche Tohmatsu Limited, which belong to the same network to which Deloitte Touche Tohmatsu LLC belongs. The table below shows the amount of fees paid to member firms of Deloitte Touche Tohmatsu Limited (excluding Deloitte Touche Tohmatsu LLC) by Mitsui and its consolidated subsidiaries, for the years ended March 31, 2018 and 2017.
Year ended March 31, 2018 Year ended March 31, 2017 Classification Audit Fees Non Audit Fees Audit Fees Non Audit Fees (Millions of Yen) (Millions of Yen) (Millions of Yen) (Millions of Yen) Mitsui 8 72 2 97
Consolidated subsidiaries 2,321 181 2,209 258
Total 2,329 253 2,211 355
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3) Details of non-auditing work performed by the certified public accountant auditor of Mitsui
The non-auditing work for which Mitsui pays a fee to Deloitte Touche Tohmatsu LLC includes tax-related services and so on.
4) Policy for determining audit fees
In determination of audit fees, factors such as the auditing plans and the status of execution of duties by the auditor in the previous fiscal year are taken into account. The approval of the Audit & Supervisory Board is obtained when decisions on fees for auditing work are made.
108 5. Financial Information
1. Consolidated Financial Statements
Consolidated Statements of Financial Position Mitsui & Co., Ltd. and subsidiaries March 31, 2018 and 2017 Millions of U.S. Dollars Millions of Yen (Note 2)
2018 2017 2018 ASSETS Current Assets: Cash and cash equivalents (Notes 2 and17) .………………………………………………………….. ¥ 1,131,380 ¥ 1,503,820 $ 10,673 Trade and other receivables (Notes 2, 8, 9, 10and 17) ……………………………………………….... 1,766,017 1,739,402 16,661 Other financial assets (Notes 2, 9 and 24)...…………………………………………………………… 243,915 267,680 2,301 Inventories (Notes 2, 9, 11 and 24) .…………………………………………………………………… 550,699 589,539 5,195 Advance payments to suppliers …...…………………………………………………………………… 307,339 225,442 2,899 Assets held for sale (Note 4) .…………………………………………………………………………... 108,920 - 1,028 Other current assets ……………………………………………………………………………………. 117,886 148,865 1,112 Total current assets ……………………………………………………………………………….. 4,226,156 4,474,748 39,869 Non-current Assets: Investments accounted for using the equity method (Notes 2, 6, 7, 17 and 27) ………………………… 2,502,994 2,741,741 23,613 Other investments (Notes 2, 9, 17, 24 and 27) ………………………………………………………… 1,825,026 1,337,164 17,217 Trade and other receivables (Notes 2, 8, 9, 10 and 17) ...……………………………………………… 400,079 477,103 3,774 Other financial assets (Notes 2, 9 and 24) ……………………………………………………………… 153,149 145,319 1,445 Property, plant and equipment (Notes 2, 10, 12, 15 and 17) …………………………………………… 1,729,897 1,823,492 16,320 Investment property (Notes 2, 10 and 13) ……………………………………………………………… 188,953 179,789 1,783 Intangible assets (Notes 2 and 14) ……………………………………………………………………… 173,207 168,677 1,634 Deferred tax assets (Notes 2 and 23)…………………………………………………………………… 49,474 92,593 467 Other non-current assets ………………………………………………………………………………… 57,725 60,387 545 Total non-current assets …………………………………………………………………………… 7,080,504 7,026,265 66,798 Total assets ……………………………………………………………………………………… ¥ 11,306,660 ¥ 11,501,013 $ 106,667
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Consolidated Statements of Financial Position―(Continued) Mitsui & Co., Ltd. and subsidiaries March 31, 2018 and 2017 Millions of U.S. Dollars Millions of Yen (Note 2)
2018 2017 2018 LIABILITIES AND EQUITY Current Liabilities: Short-term debt (Notes 16, 17 and 26) ………………………………………………………………… ¥ 201,556 ¥ 304,563 $ 1,901 Current portion of long-term debt (Notes 9, 10, 16, 17 and 26) ……………………………………… 482,550 388,347 4,552 Trade and other payables (Notes 2, 10 and 16) ………………………………………………………… 1,264,285 1,203,707 11,927 Other financial liabilities (Notes 2, 9, 16, 24 and 25) ………………………………………………….. 300,284 315,986 2,833 Income tax payables (Notes 2 and 23) ………………………………………………………………… 62,546 52,177 590 Advances from customers ……………………………………………………………………………… 287,779 212,142 2,715 Provisions (Notes 2, 18 and 28) ………………………………………………………………………… 28,036 13,873 264 Liabilities directly associated with assets held for sale (Note 4)………………………………………… 40,344 - 381 Other current liabilities ………………………………………………………………………………… 31,392 33,172 297 Total current liabilities …………………………………………………………………………… 2,698,772 2,523,967 25,460 Non-current Liabilities: Long-term debt, less current portion (Notes 9, 10, 16, 17 and 26) …………………………………… 3,542,829 4,108,674 33,423 Other financial liabilities (Notes 2, 9, 16, 24 and 25) …………………………………………………… 103,162 111,289 973 Retirement benefit liabilities (Notes 2 and 19) ………………………………………………………… 50,872 60,358 480 Provisions (Notes 2, 18 and 28) ………………………………………………………………………… 200,649 196,718 1,893 Deferred tax liabilities (Notes 2 and 23) ………………………………………………………………… 467,003 481,358 4,406 Other non-current liabilities …………………………………………………………………………… 25,250 28,487 238 Total non-current liabilities ……………………………………………………………………… 4,389,765 4,986,884 41,413 Total liabilities …………………………………………………………………………………… 7,088,537 7,510,851 66,873 Equity: (Note 20) Common stock ………………………………………………………………………………………… 341,482 341,482 3,222 Capital surplus ………………………………………………………………………………………… 386,165 409,528 3,643 Retained earnings ……………………………………………………………………………………… 2,903,432 2,550,124 27,391 Other components of equity (Notes 2 and 9) …………………………………………………………… 448,035 485,447 4,227 Treasury stock …………………………………………………………………………………………… (104,399) (54,402) (985) Total equity attributable to owners of the parent ……………………………………………………… 3,974,715 3,732,179 37,498 Non-controlling interests (Note 2) ……………………………………………………………………… 243,408 257,983 2,296 Total equity ………………………………………………………………………………………… 4,218,123 3,990,162 39,794 Total liabilities and equity ……………………………………………………………………… ¥ 11,306,660 ¥ 11,501,013 $ 106,667
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Consolidated Statements of Income and Comprehensive Income Consolidated Statements of Income Mitsui & Co., Ltd. and subsidiaries Years Ended March 31, 2018 and 2017 Millions of U.S. Dollars Millions of Yen (Note 2)
2018 2017 2018 Revenue (Notes 2, 6, 7, 9 and 24): Sale of products ………………………………………………………………………………………… ¥ 4,330,823 ¥ 3,833,564 $ 40,857 Rendering of services …………………………………………………………………………………… 436,606 405,893 4,119 Other revenue …………………………………………………………………………………………… 124,720 124,512 1,176 Total revenue ……………………………………………………………………………………… 4,892,149 4,363,969 46,152
Cost (Notes 2, 6 and 9): Cost of products sold …………………………………………………………………………………… (3,856,008) (3,418,437) (36,377) Cost of services rendered ……………………………………………………………………………… (186,093) (171,741) (1,756) Cost of other revenue …………………………………………………………………………………… (59,343) (54,496) (560) Total cost ………………………………………………………………………………………… (4,101,444) (3,644,674) (38,693) Gross Profit …………………………………………………………………………………………… 790,705 719,295 7,459 Other Income (Expenses): Selling, general and administrative expenses (Notes 2, 8, 14, 19 and 22) ……………………………… (571,703) (538,975) (5,393) Gain (loss) on securities and other investments-net (Notes 2, 6, 9, 24 and 27) ………………………… 55,146 64,962 520 Impairment reversal (loss) of fixed assets-net (Notes 2, 12, 14 and 15) ……………………………… (25,454) (5,732) (240) Gain (loss) on disposal or sales of fixed assets-net (Notes 12 and 14 ) ………………………………… 15,108 11,013 143 Provision related to Multigrain business (Note 2 and 28) ……………………………………………… (25,006) - (236) Other income (expense)-net (Notes 2 and 15) ………………………………………………………… 15,826 9,877 149 Total other income (expenses) …………………………………………………………………… (536,083) (458,855) (5,057) Finance Income (Costs) (Notes 2 and 9): Interest income ………………………………………………………………………………………… 36,516 34,905 344 Dividend income ……………………………………………………………………………………… 84,793 51,874 800 Interest expense (Note 18) ……………………………………………………………………………… (66,488) (56,997) (627) Total finance income (costs) ……………………………………………………………………… 54,821 29,782 517 Share of Profit (Loss) of Investments Accounted for Using the Equity Method 234,941 170,569 2,216 (Notes 2, 6, 7 and 27) …………………………………………………………………………………… Profit before Income Taxes …………………………………………………………………………… 544,384 460,791 5,135 Income Taxes (Notes 2, 23 and 27) …………………………………………………………………… (103,082) (134,641) (972) Profit for the Year ……………………………………………………………………………… ¥ 441,302 ¥ 326,150 $ 4,163
Profit for the Year Attributable to: Owners of the parent …………………………………………………………………………………… ¥ 418,479 ¥ 306,136 $ 3,948 Non-controlling interests ……………………………………………………………………………… 22,823 20,014 215
U.S. Dollars
Yen (Note 2) Earnings per Share Attributable to Owners of the Parent (Notes 2 and 21): Basic …………………………………………………………………………………………………… ¥ 237.67 ¥ 171.20 $ 2.24 Diluted ………………………………………………………………………………………………… ¥ 237.50 ¥ 171.10 $ 2.24
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Consolidated Statements of Income and Comprehensive Income―(Continued) Consolidated Statements of Comprehensive Income Mitsui & Co., Ltd. and subsidiaries Years Ended March 31, 2018 and 2017 Millions of U.S. Dollars Millions of Yen (Note 2)
2018 2017 2018 Comprehensive Income: Profit for the year ………………………………………………………………………………… ¥ 441,302 ¥ 326,150 $ 4,163
Other comprehensive income: Items that will not be reclassified to profit or loss: Financial assets measured at FVTOCI (Notes 2 and 9) …………………………………………… 174,983 198,971 1,651 Remeasurements of defined benefit pension plans (Notes 2 and 19) ……………………………… 14,242 16,379 134 Share of other comprehensive income of investments accounted for using 4,372 (3,132) 41 the equity method (Note 6)……………………………………………………………………… Income tax relating to items not reclassified (Note 20) …………………………………………… (48,857) (54,549) (461) Items that may be reclassified subsequently to profit or loss: Foreign currency translation adjustments (Notes 2 and 9) ………………………………………… (77,310) 23,404 (729) Cash flow hedges (Notes 2 and 9) ………………………………………………………………… 5,551 11,243 52 Share of other comprehensive income of investments accounted for using (51,979) 7,601 (490) the equity method (Note 6) ……………………………………………………………………… Reclassification adjustments ……………………………………………………………………… 4,942 (8,004) 47 Income tax relating to items that may be reclassified (Note 20) ………………………………… (32,649) 7,094 (308) Total other comprehensive income …………………………………………………………………… (6,705) 199,007 (63) Comprehensive Income for the Year ………………………………………………………………… ¥ 434,597 ¥ 525,157 $ 4,100
Comprehensive Income for the Year Attributable to: Owners of the parent ………………………………………………………………………………… ¥ 416,113 ¥ 503,025 $ 3,926 Non-controlling interests (Note 20) ………………………………………………………………… 18,484 22,132 174
112
Consolidated Statements of Changes in Equity Mitsui & Co., Ltd. and subsidiaries Years Ended March 31, 2018 and 2017 Attributable to owners of the parent
Other Non- Common Capital Retained Components Treasury controlling Total Millions of Yen Stock Surplus Earnings of Equity Stock Total Interests Equity Balance as at April 1, 2016 ¥ 341,482 ¥ 412,064 ¥ 2,314,185 ¥ 317,955 ¥ (5,961) ¥ 3,379,725 ¥ 286,811 ¥ 3,666,536 Profit for the year ………… 306,136 306,136 20,014 326,150 Other comprehensive income 196,889 196,889 2,118 199,007 for the year (Notes 2, 9 and 20) … Comprehensive income for the year … 503,025 22,132 525,157 Transaction with owners: Dividends paid to the owners of the (102,187) (102,187) (102,187) parent (per share: ¥57) ………… Dividends paid to non-controlling (52,706) (52,706) interest shareholders …………… Acquisition of treasury stock …… (48,648) (48,648) (48,648) Sale of treasury stock …………… (0) 207 207 207 Compensation costs related to stock 164 164 164 options …………………………… Equity transactions with non-controlling interest (2,700) 2,593 (107) 1,746 1,639 shareholders (Notes 2 and 20) … Transfer to retained earnings (Notes 2 31,990 (31,990) － － and 20) …………………………… Balance as at March 31, 2017 ¥ 341,482 ¥ 409,528 ¥ 2,550,124 ¥ 485,447 ¥ (54,402) ¥ 3,732,179 ¥ 257,983 ¥ 3,990,162 Profit for the year ………… 418,479 418,479 22,823 441,302 Other comprehensive income (2,366) (2,366) (4,339) (6,705) for the year (Notes 2, 9 and 20) … Comprehensive income for the year … 416,113 18,484 434,597 Transaction with owners:
Dividends paid to owners of the (105,844) (105,844) (105,844) parent (per share: ¥60) …………
Dividends paid to non-controlling (24,098) (24,098) interest shareholders …………… Acquisition of treasury stock …… (50,057) (50,057) (50,057) Sale of treasury stock …………… (29) (30) 60 1 1 Compensation costs related to stock 247 247 247 options …………………………… Equity transactions with non-controlling interest (23,581) 5,657 (17,924) (8,961) (26,885) shareholders (Notes 2 and 20) … Transfer to retained earnings (Notes 2 40,703 (40,703) － － and 20) …………………………… Balance as at March 31, 2018 ¥ 341,482 ¥ 386,165 ¥ 2,903,432 ¥ 448,035 ¥ (104,399) ¥ 3,974,715 ¥ 243,408 ¥ 4,218,123
113
Attributable to owners of the parent
Other Non- Common Capital Retained Components Treasury controlling Total Millions of U.S. Dollars (Note 2) Stock Surplus Earnings of Equity Stock Total Interests Equity Balance as at March 31, 2017 $ 3,222 $ 3,863 $ 24,058 $ 4,580 $ (513) $ 35,210 $ 2,434 $ 37,644 Profit for the year ………… 3,948 3,948 215 4,163 Other comprehensive income (22) (22) (41) (63) for the year (Notes 2, 9 and 20) … Comprehensive income for the year … 3,926 174 4,100 Transaction with owners: Dividends paid to owners of the (999) (999) (999) parent (per share: $0.57) ………… Dividends paid to non-controlling (227) (227) interest shareholders …………… Acquisition of treasury stock …… (472) (472) (472) Sale of treasury stock …………… (0) (0) 0 0 0 Compensation costs related to stock 2 2 2 options …………………………… Equity transactions with non-controlling interest (222) 53 (169) (85) (254) shareholders (Notes 2 and 20) … Transfer to retained earnings (Notes 2 384 (384) － － and 20) …………………………… Balance as at March 31, 2018 $ 3,222 $ 3,643 $ 27,391 $ 4,227 $ (985) $ 37,498 $ 2,296 $ 39,794
114
Consolidated Statements of Cash Flows Mitsui & Co., Ltd. and subsidiaries Years Ended March 31, 2018 and 2017 Millions of U.S. Dollars Millions of Yen (Note 2)
2018 2017 2018 Operating Activities : Profit for the year ……………………………………………………………………………… ¥441,302 ¥326,150 $4,163 Adjustments to reconcile profit for the year to cash flows from operating activities: ………………… Depreciation and amortization …………………………………………………………………… 192,587 193,329 1,817 Change in retirement benefit liabilities …………………………………………………………… 4,326 (637) 41 Provision for doubtful receivables ………………………………………………………………… 20,331 9,172 192 Provision related to Multigrain business 25,006 - 236 (Gain) loss on securities and other investments-net ……………………………………………… (55,146) (64,962) (520) Impairment (reversal) loss of fixed assets-net …………………………………………………… 25,454 5,732 240 (Gain) loss on disposal or sales of fixed assets-net ……………………………………………… (15,108) (11,013) (143) Finance (income) costs ……………………………………………………………………… (50,911) (22,967) (480) Income taxes ……………………………………………………………………………………… 103,082 134,641 972 Share of (profit) loss of investments accounted for using the equity method …………………… (234,941) (170,569) (2,216) Valuation (gain) loss related to contingent considerations and others (5,230) - (49) Changes in operating assets and liabilities: Change in trade and other receivables ………………………………………………………… (198,407) (121,022) (1,872) Change in inventories …………………………………………………………………………… 9,813 (60,272) 92 Change in trade and other payables …………………………………………………………… 99,814 111,917 942 Other-net ………………………………………………………………………………………… (24,062) (21,298) (227) Interest received …………………………………………………………………………………… 33,935 30,085 320 Interest paid ……………………………………………………………………………………… (69,935) (65,352) (660) Dividends received ………………………………………………………………………………… 376,422 194,698 3,551 Income taxes paid ………………………………………………………………………………… (153,694) (99,803) (1,450) Income taxes refunded …………………………………………………………………………… 29,007 36,342 274 Cash flows from operating activities ……………………………………………………………… 553,645 404,171 5,223 Investing Activities (Note 26): Change in time deposits ………………………………………………………………………………… 8,368 (8,936) 79 Investments in equity accounted investees …………………………………………………………… (204,610) (240,519) (1,930) Proceeds from sales of investments in equity accounted investees ………………………………… 89,615 85,096 845 Purchases of other investments ………………………………………………………………………… (83,507) (70,357) (788) Proceeds from sales and maturities of other investments ……………………………………………… 59,984 142,524 566 Increase in loan receivables …………………………………………………………………………… (75,799) (135,551) (715) Collections of loan receivables ………………………………………………………………………… 101,530 26,482 958 Purchases of property, plant and equipment ………………………………………………………… (174,154) (168,159) (1,643) Proceeds from sales of property, plant and equipment ………………………………………………… 38,440 18,591 362 Purchases of investment property ……………………………………………………………………… (23,314) (23,313) (220) Proceeds from sales of investment property ………………………………………………………… 15,236 20,843 144 Cash flows from investing activities ……………………………………………………………… (248,211) (353,299) (2,342) Financing Activities (Note 26): Change in short-term debt ……………………………………………………………………………… (99,045) (48,983) (934) Proceeds from long-term debt ………………………………………………………………………… 247,811 800,248 2,338 Repayments of long-term debt ………………………………………………………………………… (599,029) (603,447) (5,651) Purchases and sales of treasury stock …………………………………………………………………… (49,992) (48,647) (472) Dividends paid ………………………………………………………………………………………… (105,844) (102,187) (999) Transactions with non-controlling interests shareholders ……………………………………………… (46,193) (47,249) (436) Cash flows from financing activities ……………………………………………………………… (652,292) (50,265) (6,154) Effect of Exchange Rate Changes on Cash and Cash Equivalents ………………………………… (24,529) 12,438 (231) Effect of Cash and Cash Equivalents Included in Assets Held for Sale (1,053) - (10) Change in Cash and Cash Equivalents ……………………………………………………………… (372,440) 13,045 (3,514) Cash and Cash Equivalents at Beginning of Year …………………………………………………… 1,503,820 1,490,775 14,187 Cash and Cash Equivalents at End of Year ………………………………………………………… ¥1,131,380 ¥1,503,820 $10,673
115 1. REPORTING ENTITY
Mitsui & Co., Ltd. (the “Company”) is a company incorporated in Japan. The consolidated financial statements of the Company have an annual closing date as of March 31. The consolidated financial statements are comprised of the financial statements of the Company, its subsidiaries, and its interests in associated companies and joint ventures (collectively, the “equity accounted investees”).
The Company and its subsidiaries, as sogo shosha or general trading companies, are engaged in business activities, such as trading in various commodities, financing for customers and suppliers in relation to such trading activities worldwide, and organizing and coordinating industrial projects through their worldwide business networks.
The Company and its subsidiaries conduct sales, exports, imports, offshore trades and manufacturing of products in the areas of “Iron & Steel Products,” “Mineral & Metal Resources,” “Machinery & Infrastructure,” “Chemicals,” “Energy,” “Lifestyle,” and “Innovation & Corporate Development,” while providing general services for retailing, information and communications, technical support, transportation and logistics and financing.
In addition to the above, the Company and its subsidiaries are also engaged in the development of natural resources such as oil and gas, and iron and steel raw materials and in strategic business investments in new areas such as information technology, renewable energy, and the environmental solutions business.
2. BASIS OF CONSOLIDATED FINANCIAL STATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Ⅰ. STATEMENT OF COMPLIANCE
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
Ⅱ. FUNCTIONAL CURRENCY AND PRESENTATION CURRENCY
The consolidated financial statements are presented in Japanese yen. It is the functional currency of the Company, and all financial information presented in Japanese yen has been rounded to the nearest million.
The translation of Japanese yen amounts into U.S. dollar amounts for the year ended March 31, 2018 is included solely for the convenience of readers outside Japan. The translation has been made at the rate of ¥106=U.S. $1, the approximate rate of exchange at March 31, 2018. The translation should not be construed as a representation that the Japanese yen amounts could be converted into U.S. dollars at the above or any other rate.
Ⅲ. BASIS OF MEASUREMENT
The consolidated financial statements have been prepared under the historical cost basis, except for items such as financial instruments, assets and liabilities related to defined benefit pension plans, and a part of inventories as explained in V. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Ⅳ. USE OF ESTIMATES AND JUDGMENTS
The preparation of the consolidated financial statements requires management to make judgments based on assumptions and estimates that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results could differ from these judgments and estimates. The judgments based on assumptions and estimates are reviewed on an ongoing basis. Main assumptions and estimates that may have a significant risk of resulting in a material adjustment in the consolidated financial statements within the next financial year are as follows: - Impairment and its reversal of non-financial assets (See Ⅴ. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES “Impairment of non-financial assets and investments accounted for using the equity method”, “Oil and gas producing activities”, Note 6 “INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD”, Note 12 “PROPERTY, PLANT AND
116 EQUIPMENT”, Note 14 “INTANGIBLE ASSETS” and Note 15 “EXPLORATION AND EVALUATION FOR MINERAL RESOURCES AND OIL & GAS”) - Revaluation of financial instruments (See Ⅴ. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES “Financial instruments”, Note 8 “RECEIVABLES AND RELATED ALLOWANCES”, Note 9 “DISCLOSURES ABOUT FINANCIAL INSTRUMENTS AND RELATED MATTERS” and Note 24 “FAIR VALUE MEASUREMENT”) - Provisions (See Ⅴ. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES “Provisions”, “Asset retirement obligations” , Note 18 “PROVISIONS” and Note 28 “PROVISION RELATED TO MULTIGRAIN BUSINESS”) - Measurement of defined benefit obligations (See Ⅴ. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES “Employee benefits” and Note 19 “EMPLOYEE BENEFITS”) - Recoverability of deferred tax assets (See Ⅴ. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES “Income taxes” and Note 23 “INCOME TAXES”)
Changes in judgments based on assumptions and estimates which could affect the accompanying consolidated financial statements are mainly as follows. - Measurement of the recoverable amounts of non-financial assets (See Note 6 “INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD”, Note 12 “PROPERTY, PLANT AND EQUIPMENT” and Note 14 “INTANGIBLE ASSETS”) - Provisions (See Note 18 “PROVISIONS” and Note 28 “PROVISION RELATED TO MULTIGRAIN BUSINESS”) - Recoverability of deferred tax assets (See Note 23 “INCOME TAXES”) - Revaluation for financial instruments (See Note 24 “FAIR VALUE MEASUREMENT”)
Information about signficant judgments made in the application of the accounting policies which have an impact on the consolidated financial statements are as follows: - Scope of consolidated subsidiaries, associated companies, and joint ventures (See Ⅴ. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES “Consolidation”, “Investments in associated companies and joint arrangements”, Note 5 “CONSOLIDATED SUBSIDIARIES” and Note 6 “INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD”) - Financial instruments (See Ⅴ. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES “Financial instruments”, Note 9 “DISCLOSURES ABOUT FINANCIAL INSTRUMENTS AND RELATED MATTERS” and Note 24 “FAIR VALUE MEASUREMENT”) - Accounting for leases (See Ⅴ. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES “Leasing” and Note 10 “LEASES”)
Ⅴ. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of the Company, its subsidiaries (which are controlled either directly or indirectly through voting or similar rights), and structured entities (“SEs”). They are collectively called the “companies,” where the Company or one of its subsidiaries have control. SEs are entities controlled through means other than voting or similar rights. The word “control” is used based on its definition in IFRS 10 “Consolidated Financial Statements,” so that the companies consider all facts and circumstances, including existing rights and substantive rights included within agreements with investees.
The consolidated financial statements include financial statements of certain subsidiaries with different fiscal year-ends from that of the Company, as the Company considers it impracticable to unify the fiscal year-ends of such subsidiaries with that of the Company.
Major consolidated subsidiaries with different fiscal year-ends include subsidiaries that operate exploration, development and production of oil and gas. As the Company is a non-operator in such operations and the financial information is prepared by the operators, the Company is unable to obtain necessary information from the operators in time for the preparation of the Company’s year end consolidated financial statements. For the same reasons, it is also impracticable to prepare additional financial statements for these subsidiaries as of the same date as the Company’s year-end date. Therefore, financial information for such subsidiaries with fiscal year-ends of December 31 is included in the Company’s consolidated results.
There are other consolidated subsidiaries for which it is also considered impracticable to unify on fiscal year-ends with on the Company’s due to requirements of local laws and regulations, and it is also impracticable to prepare additional financial statements for these subsidiaries as of the same date as the Company’s year-end date due to certain facts and circumstances such as local business
117 practices and the environment surrounding their respective accounting systems. The fiscal year-ends of such consolidated subsidiaries are mainly December 31.
Adjustments are made for the effects of significant transactions or events that occur between the ends of the fiscal years of such consolidated subsidiaries and that of the Company.
Changes in the companies’ ownership interests that are made while retaining their controlling financial interests in their subsidiaries are accounted for as equity transactions. When the companies cease to have their controlling financial interests, any retained investments are measured at their fair value at that date. The difference between the fair value and the carrying amount of the retained non-controlling investments is recognized as gain (loss) on securities and other investments－net.
Investments in associated companies and joint arrangements
Associated companies are entities over which the Company and its subsidiaries own 20% or more of the voting rights. The exceptions to this rule include the entities in which it can be clearly demonstrated that the Company and its subsidiaries are unable to exercise significant influence over the financial and operating policy decisions of the investees, or those whereby the companies have the ability to exercise significant influence despite holding less than 20% ownership. Investments in associated companies are accounted for using the equity method.
Joint arrangements are arrangements in which decisions about relevant activities require the unanimous consent of the parties sharing control. When the parties that have joint control of the arrangement have substantial rights to the assets and obligations for the liabilities, relating to the arrangement, the arrangement is a joint operation. When an arrangement is structured through a separate vehicle and the parties that have joint control of the arrangement have rights to the net assets of the arrangement, the arrangement is classified as a joint venture. A joint operation is accounted for by recognizing the assets, liabilities, revenues and expenses relating to its interest in the joint operation. A joint venture is accounted for using the equity method.
Robe River Iron Associates (the Company’s percentage of ownership: 33%), which conducts iron ore mining activities in Australia, is a major joint operation.
The consolidated financial statements include some associated companies, joint ventures and joint operations with different fiscal year -ends from that of the Company. It is impracticable to unify the fiscal year-ends due to the requirement of local laws and regulations and relationships with other shareholders, it is also impracticable to prepare additional financial statements as of the same date as the financial statements of the companies due to certain factors such as local business practices and the environment surrounding their respective accounting systems. The fiscal year-ends of associated companies, joint ventures and joint operations are generally December 31. Adjustments are made for the effects of significant transactions or events that occur between the ends of the fiscal years of such associated companies, joint ventures and joint operations and that of the Company. The companies discontinue the use of the equity method from the date when an investment ceases to be an associated company or a joint venture. Any retained investments are measured at their fair value at that date, and the difference between the fair value and the carrying amount of the retained investments is recognized as gain (loss) on securities and other investments－net. Regarding impairment of investments accounted for using the equity method , please refer to “Impairment of non-financial assets and investments accounted for using the equity method.”
Business combinations
In accordance with IFRS 3 “Business Combinations,” all business combinations are accounted for using the acquisition method. This is a method where all assets and liabilities of an acquired company, including non-controlling interests, are measured at fair value. The differences between consideration transferred and the net fair value of identifiable assets and liabilities are recognized as goodwill when the consideration transferred is in excess of the net fair value of identifiable assets and liabilities. If the net fair value of identifiable assets and liabilities exceed the consideration transferred, the excess is recognized immediately as a gain in the Consolidated Statements of Income for the year.
118 Foreign currency translation
The assets and liabilities of foreign subsidiaries and equity accounted investees are translated into Japanese yen using the spot exchange rate at the respective reporting date. All income and expense accounts are translated into Japanese yen using average rates of exchange for the respective reporting period. The resulting translation adjustments are recognized in other components of equity.
Foreign currency transactions are translated into functional currencies of individual companies using the spot exchange rate at the date of transactions. At the end of each reporting period, monetary assets and liabilities, and non-monetary assets and liabilities measured at fair value denominated in foreign currencies are translated into functional currencies using the spot exchange rate at the reporting date. The exchange differences arising from translation are recognized in profit for the year.
Non-monetary items measured at historical cost denominated in foreign currencies are translated using the spot exchange rate at the date of transaction.
Cash equivalents
Cash equivalents are defined as short-term (original maturities of three months or less), highly liquid investments which are readily convertible into cash and have no significant risk of change in value. These include certificates of deposit, time deposits, financing bills and commercial paper with original maturities of three months or less.
Inventories
Inventories, consisting mainly of commodities and materials for sale, are measured at the lower of cost and net realizable value. The cost of inventory items that is not ordinarily interchangeable is assigned by using specific identification of their individual costs. For those items which are interchangeable, the costs are mainly assigned by using the weighted-average cost formula. Inventories acquired for the purpose of being sold in the near term to profit from fluctuations in price are measured at fair value less costs to sell, and changes in the fair value less costs to sell are recognized in profit for the year.
Financial instruments
The companies have early adopted IFRS 9 “Financial Instruments” (amended in November 2013).
Non-derivative financial assets Trade and other receivables are recognized at fair value on initial recognition. Regular purchases of other financial assets are recognized at fair value on the trade date. These financial assets are derecognized if they satisfy any of the following conditions: - the contractual rights to the cash flows from the financial asset have expired; or - the contractual rights to receive the cash flows of the financial asset have been transferred, and substantially all risks and rewards of the ownership of financial asset have been transferred.
Non-derivative financial assets are classified and measured as follows:
Non-derivative financial assets that are debt instruments are measured at amortized cost if they meet the following two criteria held for the purpose of collecting contractual cash flows and have contractual terms which give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Amortized cost is calculated by using the effective interest rate method. For financial assets measured at amortized cost, the companies consider if an impairment has occurred. Please see Impairment of financial assets regarding impairment.
Equity financial instruments and non-derivative financial assets that do not satisfy the requirements to be measured at amortized cost are measured at fair value through profit or loss (“FVTPL”). However, for certain equity financial instruments held primarily for the purpose of enhancing the revenue base by maintaining or strengthening the trade relationship with the investees, the companies elect at initial recognition to designate these instruments as at fair value through other comprehensive income (“FVTOCI”).
119 When financial assets measured at FVTOCI are derecognized, the accumulated other components of equity are directly reclassified to retained earnings without being recognized in profit for the year. Dividend income received on financial assets measured at FVTOCI is mainly recognized in profit for the year.
Non-derivative financial liabilities The companies have non-derivative financial liabilities including corporate bonds and loans payable, trade and other payables, and other financial liabilities. Corporate bonds issued by the companies are recognized on the issue date and all other non-derivative financial liabilities are recognized on the trade date at fair value plus or minus transaction costs that are directly attributable to the acquisition or issue of the financial liabilities. Subsequent to initial recognition, non-derivative financial liabilities are measured at amortized cost using the effective interest method. The companies derecognize a non-derivative financial liability only when it is extinguished (that is, the underlying obligation specified in the contract is discharged, cancelled or expires).
Impairment of financial assets For financial assets measured at amortized cost, the companies recognize an allowance for doubtful receivables on an individual basis for certain receivables if there is objective evidence of a loss event based on the latest information or events. Objective evidence includes cases such as those where the debtor is under legal reorganization and in financial failure or has a serious problem in repaying debts due to financial difficulty, although it may not yet be in financial failure. Impairment losses are measured by using the present value of expected future cash flows discounted at the effective interest rate based on the original terms of the contract, or at fair value of the collateral if their value depends on the collateral.
Similarly, debt securities measured at amortized cost are assessed for impairment, and impairment losses are directly deducted from the carrying amount. Impairment losses are recognized in profit for the year. After an impairment loss is recognized, interest income continues to be recognized on the reduced carrying amount using the same discount rate used to discount the expected future cash flows when the impairment loss was measured.
If the fair value of previously impaired receivables or debt securities measured at amortized cost subsequently recovers due to factors occurring after the recognition of impairment, a reversal of impairment loss is recognized in profit for the year. The reversal amount is directly added to the carrying amount for debt securities, or deducted from related provision for receivables. The carrying amount after a reversal of impairment loss cannot exceed the carrying amount that would have been recorded, had the impairment loss not been recognized in prior years.
Other than the cases above, as for the corporate businesses, an allowance for doubtful receivables is measured collectively based primarily upon the companies’ historical credit loss experiences and an evaluation of the potential losses for all receivables. As for the retail finance business, some subsidiaries engaged in the business of providing financial services for the purchase of automobiles and motorcycles have credit risks relating to retail customers. Those subsidiaries record an allowance for doubtful receivables collectively based on each subsidiaries’ historical credit loss ratio based on dates past due of the receivables considering the current economic situation.
Loans and trade receivables are written off when certain conditions are met. The following are examples of when loans and trade receivables are charged-off: write-off of loans and receivables by legal liquidation, obtaining of evident facts that suggest that it is impossible for the debtors to repay their debts from their perceived solvency and/or asset situation, and arrearage of payment after a certain period of time after a suspension of business operations.
Finance income and costs Finance income and costs consist of items such as interest income, interest expense, dividend income and gain or loss on hedging instruments recognized in profit for the year. Interest income and interest expense are recognized using the effective interest method. Dividend income is recognized on the date when the rights of the companies to received dividends vest. See Derivative instruments and hedging activities for accounting for gains or losses arising from hedging instruments.
Derivative instruments and hedging activities The companies are exposed to market risks related to foreign currency exchange rates, interest rates and commodity prices in the ordinary course of business. In order to mitigate or reduce these risks, the companies use derivative instruments, such as foreign exchange forward contracts, currency swap agreements, interest rate swap agreements, commodity futures, forwards, options and
120 swap contracts. These derivative instruments hedge the exposure to changes in the fair value or expected future cash flows of recognized assets and liabilities, unrecognized firm commitments or forecasted transactions. The companies also use derivative instruments and non-derivative financial instruments, such as foreign currency-denominated debt, to hedge foreign currency exposure to net investments in foreign operations. The companies recognize all derivative instruments as an asset or a liability at fair value as at the date on which they become party to the relevant agreement. Subsequent to initial recognition, derivative instruments are measured at fair value with any changes in fair value accounted for as follows: ・ Fair value hedges Derivative instruments held for the purpose of eliminating the risk of changes in the fair value of hedged items are designated as fair value hedges and subject to the assessment of hedge effectiveness. To the extent that they satisfy the requirements for hedge accounting, the companies include the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the derivative instruments designated as hedging instruments mainly as interest expense.
・ Cash flow hedges Derivative instruments held for the purpose of offsetting the variability in cash flows of the hedged items are designated as cash flow hedges. To the extent that they are effective, any changes in fair value are recognized in other comprehensive income until cash flows of the hedged item affect gain or loss. The amounts previously recognized in other comprehensive income are reclassified into profit for the year mainly as interest expense and other income (expense)-net when earnings are affected by the hedged items.
・ Hedges of net investments in foreign operations The foreign currency transaction gain or loss on derivative instruments and non-derivative financial instruments that are designated as, and are effective as, hedging instruments to reduce the foreign currency exposure of a net investment in a foreign operation are recorded as foreign currency translation adjustments within other comprehensive income to the extent they are effective as a hedge. The amounts in other components of equity are reclassified into profit for the year mainly as gain (loss) on securities and other investments-net when the related investment is sold completely or partially, or the liquidation of the investment is completed. The ineffective portion of the hedging instruments’ gain or loss and the component of the derivative instruments’ gain or loss excluded from the assessment of hedge effectiveness are recorded immediately in profit for the year mainly as other income (expenses)-net.
・ Derivative instruments for trading purposes The Company and certain subsidiaries use derivative instruments for trading purposes within certain position and loss limits. Derivative instruments for trading purposes are measured at fair value and changes in fair value are recorded in profit for the year as other revenue.
Offsetting financial assets and financial liabilities Financial assets and financial liabilities are offset and the net amount is presented in the consolidated statements of financial position when, and only when, the companies currently have a legally enforceable right to set off the recognized amounts and intend either to settle on a net basis, or to realize the asset and settle the liability simultaneously.
Leasing
The companies are engaged in finance and operating lease businesses. Leases are classified as finance leases whenever they transfers substantially all the risks and rewards of ownership to the lessee. Leases other than finance leases are classified as operating leases. For finance leases, unearned income is amortized to income over the lease term at a constant periodic rate of return on the net investment. Operating lease income is recognized as revenue over the term of underlying leases using the straight-line method.
The companies are also lessees of various assets. Lease expenses on operating leases are recognized over the respective lease terms using the straight-line method.
Property, plant and equipment
Property, plant and equipment are measured based on the cost model and are stated at cost less accumulated depreciation and impairment losses.
121
Depreciation of property, plant and equipment, except for land and projects in progress, is computed principally under the straight-line method, using rates based on the estimated useful lives of the related assets. The estimated useful lives for buildings, equipment and fixtures and vessels and aircrafts are primarily 2 to 52 years, 2 to 50 years, and 3 to 20 years, respectively. Mineral rights are primarily amortized using the unit-of-production method.
Investment property
Investment property is measured by using the cost model and is stated at cost less accumulated depreciation and impairment losses. Depreciation of investment property is computed principally under the straight-line method, using rates based upon the estimated useful lives of the related investment property. The estimated useful lives for investment properties are primarily 2 to 50 years.
Intangible assets
Intangible assets include goodwill arising from the acquisition of subsidiaries. Intangible assets are measured based on the cost model and intangible assets with finite estimated useful lives are stated at cost less accumulated amortization and impairment losses. Goodwill and intangible assets with indefinite estimated useful lives are not amortized and are presented at cost less accumulated impairment losses. Software is primarily amortized over 5 years using the straight-line method.
Impairment of non-financial assets and investments accounted for using the equity method
Non-financial assets and investments accounted for using the equity method are quarterly assessed to determine whether there is any indication of impairment. If any such indication exists, the recoverable amounts of the non-financial asset and investment are estimated. Goodwill and intangible assets with indefinite useful lives are tested for impairment annually. For investments accounted for using the equity method, the entire carrying amount of the investment is tested for impairment as a single asset. The recoverable amount of an asset or a cash-generating unit (“CGU”) is the higher of its fair value less costs of disposal and its value in use and is determined as an individual asset, when the asset generates cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and the carrying amount is written down to its recoverable amount. The impairment loss is then recognized in loss for the year. For assets other than goodwill, an assessment is made quarterly as to whether there is any indication of impairment that previously recognized impairment losses may no longer exist or may have decreased. A previously recognized impairment loss is reversed as income in profit for the year. The amount is reversed to the extent that the increased carrying amount of an asset does not exceed the carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss been recognized for the asset in prior years only if there has been a change in the assumptions used to determine the recoverable amount of the asset since the last impairment loss was recognized. An impairment loss recognized for goodwill is not reversed.
Oil and gas producing activities
Oil and gas exploration and development costs are accounted for using the successful efforts method of accounting. The costs of acquiring properties, costs of drilling and equipping exploratory wells, and costs of development wells and related plant and equipment are capitalized, and amortized using the unit-of-production method. Exploratory well costs are expensed if economically recoverable reserves are not found. Other exploration costs, such as geological and geophysical costs, are expensed as incurred.
Proved properties are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If the proved properties are determined to be impaired, an impairment loss is recognized based on the recoverable amount. Unproved properties are assessed whenever there is an indication of impairment, and if the unproved properties are determined to be impaired, impairment losses are charged to expense. The companies make a comprehensive evaluation and record impairment of unproved property based on various factors, such as remaining mining rights periods, examples of sales and purchases in neighboring areas, drilling results and seismic interpretations.
122 Mining operations
Mining exploration costs are expensed as incurred until the mining project has been established as commercially viable by a final feasibility study. Once established as commercially viable, costs are capitalized as development costs and are amortized using either the unit-of-production method or straight-line method based on the proven and probable reserves. In surface mining operations, it is necessary to remove overburden and other waste materials to access mineral deposits. The costs of removing waste materials are referred to as “stripping costs.” During the development of a mine, before production commences, such costs are generally capitalized as part of development costs. Removal of waste materials continues during the production stage of the mine. Such post-production stripping costs in relation to minerals produced during the fiscal year are variable production costs to be considered as a component of mineral inventory costs. These are recognized as a component of costs in the same period as the related revenues from sales of the minerals. On the other hand, post-production stripping costs incurred that relate to minerals to be produced in the subsequent fiscal year are capitalized, and are amortized using either the unit-of-production method or straight-line method based on the proved and probable reserves.
Provisions
Provisions are recognized when the companies have a present obligation (legal or constructive) as a result of a past event, it is probable that outflows of resources embodying economic benefits will be required to settle the obligation, and reliable estimates of the amount of the obligations can be made. Provisions are measured as the best estimate of the amount of expenditure required to settle the present obligation at the end of the reporting period. If the effect of the time value of money is material, provisions are discounted to their present value using a pretax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognized as finance costs.
Asset retirement obligations
The companies recognize costs of dismantling and removing assets mainly related to mining and oil and gas production facilities, and the companies record the provision for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the companies capitalize the related cost by increasing the carrying amount of the asset. Over time, the liability is increased to its present value to reflect the passage of time, and the capitalized cost is depreciated over the useful life of the related asset.
Employee benefits
The Company and certain subsidiaries have defined benefit pension plans and severance indemnity plans. The costs of defined benefit pension plans and severance indemnity plans are accrued based on amounts determined using actuarial procedures based on the projected unit credit method. The Company and certain subsidiaries recognize the overfunded or underfunded status of a defined benefit plan as an asset or a liability in the consolidated statements of financial position. The remeasurements of defined benefit pension plans are recognized immediately in other components of equity in equity and are transferred to retained earnings on recognition.
The Company and certain subsidiaries also have defined contribution pension plans. Payments to defined contribution pension plans are recognized as an expense when employees have rendered service.
Revenue recognition
Revenue is recognized as follows:
Sales of products Revenues from sales of products include those arising from the sale of various products as a principal in transactions; the manufacture and sale of a wide variety of products such as metals, chemicals, foods and general consumer merchandise; the development of natural resources such as coal, iron ore, oil and gas; and the development and sale of real estate. The companies recognize such revenues at the time of delivery and when conditions agreed upon with customers are satisfied. These conditions are usually considered to have been met when the goods are received by the customer, the title to the warehouse receipts is transferred, or the implementation testing is duly completed.
123 For long-term construction contracts, depending on the nature of the contract, revenue is accounted for by the percentage-of- completion method if the outcome of a construction contract can be estimated reliably. Otherwise, the companies recognize revenues only to the extent that contract costs incurred are probable to be recovered. Under the percentage-of-completion method, the stage of completion of a construction contract is determined based on the proportion of costs incurred for the contract to date to the total estimated contract costs.
The Company and certain subsidiaries enter into buy/sell arrangements, mainly relating to transactions or crude oil and petroleum products. Under buy/sell arrangements, which are entered into primarily to optimize supply or demand requirements, the Company and certain subsidiaries agree to buy (sell) a specific quality and quantity of commodities to be delivered at a specific location and/or time while agreeing to sell (buy) the same quality and quantity of the commodities to be delivered at a different location and/or time to the same counterparty. The buy/sell arrangements are reported on a net basis in the consolidated statement of income.
Rendering of services Revenues from rendering of services include those arising from trading margins and commissions related to various trading transactions in which the companies act as a principal or an agent. Specifically, the companies charge a commission for the performance of various services such as logistic and warehouse services, information and communication services, and technical support. For some back-to-back sales and purchase transactions of products, the companies act as a principal and record the net amount of sales and purchase prices as revenues. The companies also facilitate conclusion of the contracts between manufacturers and customers and deliveries for the products between suppliers and customers. Revenues from service related businesses are recorded as revenue when the contracted services are rendered to third-party customers pursuant to the agreements.
Other revenue Other revenue principally includes revenues from leasing activities in real estate, rolling stock, ocean transport vessels, aircraft, equipment and others; the revenues from derivative commodity instruments and derivative financial instruments held for trading purposes, the revenues from FVTPL investments and the revenues from financing. See accounting policies for Leasing and Derivative instruments and hedging activities for revenue recognition policies regarding leasing and derivative transactions, respectively.
Income taxes
Income taxes comprise current taxes and deferred taxes. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and their tax bases, tax loss carryforwards and tax credit carryforwards. These deferred income taxes are measured using the currently enacted or substantively enacted tax rates in effect for the year in which the temporary differences, tax loss carryforwards or tax credit carryforwards are expected to reverse. Deferred tax assets are recognized except for cases where such deferred tax assets are not deemed to be recoverable.
Deferred tax liabilities are recognized for taxable temporary differences arising from investments in subsidiaries and equity accounted investees, unless the companies are able to control the timing of the reversal of the temporary differences and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets and liabilities are measured at the tax rates that are applicable to the expected manner of recovery or settlement by management.
Upon the introduction of the Expansion of the Petroleum Resource Rent Tax Act in Australia, companies are allowed to elect to use market value as a starting base for transitional projects existing at May 1, 2010. A company electing to use the market value approach can obtain a deduction for the amortization of the market value of the project. The Company’s Australian subsidiaries and equity accounted investees apply the market value approach. The Petroleum Resource Rent Tax is regarded as an income tax subject to tax effect accounting in accordance with IAS 12 “Income Taxes,” and deferred tax assets have been recognized for the operating assets based on the differences in book values for financial reporting purposes and their tax bases except for the portion that is deemed not to be recoverable. In determining recoverability, several tax deductible items such as royalties and the impact of future augmentation, which will be incurred on tax losses carried forward in the Petroleum Resource Rent Tax, have been considered.
The companies recognize uncertain tax positions in income taxes in the consolidated financial statements when it is probable that an economic outflow would occur if the tax positions were examined and challenged by tax authorities.
124 Earnings per share
Basic earnings per share attributable to owners of the parent are computed by dividing profit for the year attributable to owners of the parent by the weighted-average number of common stock outstanding during the reporting period, adjusted for the number of treasury stock acquired. Diluted earnings per share attributable to owners of the parent reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.
Ⅵ. STANDARDS AND INTERPRETATIONS NEWLY APPLIED
Effective April 1, 2017, the companies applies the following new standard for the Consolidated Financial Statements. In accordance with the new guidance, the changes in liabilities arising from financing activities are newly disclosed in Note 26 “SUPPLEMENTAL CASH FLOW INFORMATION”
IFRS Title Summary IAS 7 (amended) Statement of Cash Flows Disclosures about changes in liabilities arising from financing activities in the Consolidated Statement of Cash Flows.
Ⅶ. NEW STANDARDS AND INTERPRETATIONS NOT YET APPLIED
The new standards, interpretations, and amendments that have been issued as of the date of the approval of the Consolidated Financial Statements which the companies have not yet applied as of March 31, 2018 are as follows.
Reporting periods Reporting periods of the beginning on or after application by the Summaries of new IFRS and IFRS Title which the applications are companies amendments required （Reporting period ended）
Implementation of expected credit Financial Instruments loss model for the recognition of IFRS 9 (amended in July January 1, 2018 March 31, 2019 impairment losses of financial 2014) instruments Revenue from Accounting for recognizing IFRS 15 Contracts with January 1, 2018 March 31, 2019 revenue from contracts with Customers customers Fundamental amendment of lease IFRS 16 Leases January 1, 2019 March 31, 2020 transactions Fundamental amendment of IFRS 17 Insurance Contracts January 1, 2021 March 31, 2022 insurance contracts
Impacts of the application of IFRS 9 “Financial Instruments” amended in July, 2014 on the Consolidated Financial Statements will be immaterial. The main impacts of the application of IFRS 15 “Revenue from Contracts with Customers” on the Consolidated Financial Statements are based on the determination of whether the entity is involved in providing goods or services specified by a contract as a principal or as an agent. The revenues for certain transactions which have been recognized in the net amount as an agent based on IAS 18 will be recognized in the gross amount as a principal based on IFRS 15. Due to this change, the revenue on the Consolidated Statement of Income based on IFRS 15 for the year ending March 31, 2019 is expected to increase compared to the revenues based on IAS 18. And, if the revenues for the year ended March 31, 2018 were measured based on IFRS 15, the revenue would increase by approximately ¥1.2 trillion. The adjustment amount on the opening balance of retained earnings for the year ending March 31, 2019 will be immaterial. Also, no material impacts on line items in the Consolidated Statement of Income, including gross profit, due to the application of IFRS 15 are expected except revenue and cost for the year ending March 31, 2019. The potential impacts that application of IFRS 16“Leases”and IFRS 17“Insurance Contracts”will have on the consolidated financial statements cannot be reasonably estimated at this time.
125 Ⅷ. RECLASSIFICATION
Certain reclassifications and format changes have been made to amounts of the Consolidated Statements of Cash Flows for the year ended March 31, 2017 to conform to the current period presentation.
3. BUSINESS COMBINATIONS
No material business combinations were completed during the year ended March 31, 2018 and 2017.
After the reporting period but before the financial statements are issued, the following business combination occurred.
Oil and Gas Company in Australia
The Company made a takeover bid for all of the issued shares of AWE Limited ("AWE"). On April 4, 2018, the bid was declared unconditional, as the Company satisfied the 50.1% minimum acceptance condition, and the bid completed on May 2, 2018. The number of Target Shares accepted was 610,500,574 shares (Percentage of total issued shares: 96.48%). The Company has commenced the compulsory acquisition of all the remaining Target Shares to delist AWE from the Australian Securities Exchange ("ASX") by taking the necessary procedures in accordance with ASX rules and relevant regulations in Australia. Those procedures were completed on May 28, 2018, and the total consideration paid was ¥49,568 million (A$601 million). AWE belongs to the energy industry focusing on oil and gas. Mitsui acquired AWE to invest in high-quality oil and gas assets in Australia as well as to obtain an operational platform for extending its business in the Australian oil and gas sector. The purchase price allocation has not been completed. The following table summarizes the provisional fair values of the assets acquired and liabilities assumed at the acquisition date:
Millions of Yen
Current assets …………………………………………………………………………….... ¥ 2,686 Property, plant and equipment ...... ……………………………… 56,586 Other non-current assets ...... ………………………………………………………… 8,046 Total assets acquired ……………………………………...... ………………… ¥ 67,318 Current liabilities...... ……………………………………………………… (2,031) Non-current liabilities ...... ……………………………………………………… (15,719) Total liabilities assumed ...... ……………………………………………………… ¥ (17,750) Net assets acquired ...... ………………………………………………………… ¥ 49,568
Pro forma results of operations for the above business combination have not been presented because the effects were not material to the consolidated financial statements.
4. ASSETS HELD FOR SALE
Mitsui and Mitsui & Co. Steel Ltd. (“Mitsui Steel”), a 100% owned subsidiary of Mitsui, reached an agreement to transfer a part of the iron and steel products business of Mitsui and Mitsui Steel to NIPPON STEEL & SUMIKIN BUSSAN CORPORATION (“NSSB”) along with Mitsui's additional acquisition of shares in NSSB. This restructuring exercise will strengthen the revenue base and enhance the iron and steel business. Execution of this transfer was closed on April 1, 2018. Therefore, as of March 31, 2018, related assets and liabilities transferred from Mitsui and Mitsui Steel are presented as single line items under “Assets held for sale” and “Liabilities directly associated with assets held for sale” within the Consolidated Statements of Financial Position. These accounts mainly consist of accounts receivable-trade and notes receivable-trade, and accounts payable-trade. This transaction is included in the Iron & Steel Products Segment.
126 5. CONSOLIDATED SUBSIDIARIES
Consolidated subsidiaries
Major consolidated subsidiaries as of March 31, 2018 were as follows: Jurisdiction of Ownership of voting Registered Name Principal Lines of Business Incorporation shares (%) Mining and sales of Australian iron Australia Mitsui Iron Ore Development Pty. Ltd. 100.0 ore Perth Mining and sales of Australian iron Australia Mitsui-Itochu Iron Pty. Ltd. 70.0 ore Perth Mining and sales of Australian iron Australia Mitsui Iron Ore Corporation Pty. Ltd. 100.0 ore Perth Investments in Australian coal Australia Mitsui Coal Holdings Pty. Ltd. 100.0 business Brisbane Investment in and loan to copper Netherlands Oriente Copper Netherlands B.V. 100.0 business in Chile Amsterdam Exploration, development and Japan Mitsui Oil Exploration Co., Ltd. 74.3 production of oil and natural gas Tokyo Investments in Sakhalin Energy Netherlands Mitsui Sakhalin Holdings B.V. 100.0 Investment Company Ltd. Amsterdam Manufacturing and sales of feed U.S.A Novus International, Inc. 80.0 additives St. Charles Japan MITSUI FOODS CO., LTD. Wholesale of foods and beverages 100.0 Tokyo U.S.A Mitsui & Co. (U.S.A.), Inc. Trading 100.0 New York
Changes in owners of parent’s ownership interests due to the deconsolidation of subsidiaries
There is no significant gain or loss arising from changes in owners of parent's ownership interests due to the deconsolidation of subsidiaries during the years ended March 31, 2018 and 2017.
Unconsolidated Structured Entities (Unconsolidated SEs)
The companies are involved with SEs, established for the purpose of financing projects such as, those related to oil and gas, by providing guarantees or loans to the SEs. These SEs provide financing for customers located principally in Latin America in the form of leases and loans. The entities are financed mainly by bank borrowings and issuance of stock.
The total assets of SEs that the companies are involved with, the carrying amounts of assets and liabilities in the Consolidated Statements of Financial Position that relate to the companies’ interests in the SEs, and the companies’ maximum exposure to loss as a result of the companies’ involvement with the SEs as of March 31, 2018 and 2017 were as follows:
March 31, 2018: Millions of Yen
Assets and liabilities that relate to interests in SEs
Carrying amounts Carrying amounts Maximum
Total assets of SEs of assets of liabilities exposure to loss ¥ 723,787 ¥ 42,122 － ¥ 43,209
127
March 31, 2017: Millions of Yen
Assets and liabilities that relate to interests in SEs
Carrying amounts Carrying amounts Maximum
Total assets of SEs of assets of liabilities exposure to loss ¥ 346,275 ¥ 26,723 － ¥ 29,914 Note: The assets that relate to the companies’ interests in the SEs are mainly “Other investments” and “Trade and other receivables.”
The amount of maximum exposure to loss represents a loss that the companies could incur from financial difficulties of the customers. The amount bears no relation to the loss anticipated to be incurred from the companies’ involvement with the SEs and is considered to greatly exceed the anticipated loss.
The maximum exposure to loss that relates to the companies’ interests in the SEs represents the amounts of investments, loans and guarantees provided by the companies to the SEs as of March 31, 2018 and 2017, respectively.
The companies did not provide any financial support to the SEs for the years ended March 31, 2018 and 2017.
Consolidated Structured Entities (Consolidated SEs)
There is no consolidated SE as of March 31, 2018 and 2017.
6. INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD
Primary investees over which the companies have the ability to exercise significant influence despite ownership percentage of less than 20% are as follows:
The company is the second largest shareholder, owning 18.03% of IHH Healthcare Berhad (“IHH”) and the strategic partner of the main shareholder of IHH. IHH is utilizing the Company’s global network to develop its business activities outside Malaysia. The investment in IHH is accounted for under the equity method because of the Company's ability to exercise significant influence over operating and financial policies through its board representation on IHH and its main subsidiaries, and representation of the consultative and advisory committee on its board meeting. The Company’s significant influence will not be changed even if the potential voting rights of other shareholders are converted.
The companies are the second largest shareholder group, owning 15.68% of Penske Automotive Group, Inc. (“PAG”). The companies entered into a shareholders agreement with the largest shareholder group owning 41.53% of PAG’s voting shares. Based on a reciprocal voting provision set forth in the agreement for any shareholder election of the directors of PAG, the companies and the largest shareholder group constitute a “group” within the meaning of Section 13(d) of the Securities Exchange Act of 1934 and jointly participate in the management of PAG. The investment in PAG is accounted for under the equity method because of the companies’ ability to exercise significant influence over operating and financial policies primarily through board representation by a director and senior vice president dispatched from the companies. PAG is utilizing the companies’ global network to develop its business activities outside the United States and, as part of the process, the companies substantively participate in PAG’s decision-making processes.
One of the consolidated subsidiaries is one of the second largest shareholders, owning 16.60% of Cameron LNG Holdings, LLC ("Cameron"). The investment in Cameron is accounted for under the equity method in consideration of following factors. The Company entered into a shareholders agreement with the largest shareholder owning 50.20% of Cameron’s voting shares and other shareholders. Based on the agreement, the Company has ability to exercise significant influence over operating and financial policies through representation on board. In addition to this, other consolidated subsidiary entered into a significant agreement with Cameron’s subsidiary.
The carrying amount of the investments accounted for using the equity method for the years ended March 31, 2018 and 2017, consisted of the following:
128 Millions of Yen
2018 2017 Associated companies ………………………………………………… ¥ 1,512,322 ¥ 1,759,398 Joint ventures ………………………………………………………… 990,672 982,343 Total ………………………………………………………………… ¥ 2,502,994 ¥ 2,741,741
Share of profit and other comprehensive income of the equity accounted investees for the years ended March 31, 2018 and 2017 were as follows: Millions of Yen
2018 2017 Profit (loss) for the year ……………………………………………… Associated companies ……………………………………………… ¥ 135,710 ¥ 132,213 Joint ventures ……………………………………………………… 99,231 38,356 Total ……………………………………………………………… ¥ 234,941 ¥ 170,569 Other comprehensive income (loss) …………………………………… Associated companies ……………………………………………… ¥ (23,934) ¥ (882) Joint ventures ……………………………………………………… (14,084) (8,778) Total ……………………………………………………………… ¥ (38,018) ¥ (9,660) Total comprehensive income (loss) …………………………………… ¥ 196,923 ¥ 160,909
Dividends received from the equity accounted investees for the years ended March 31, 2018 and 2017 were as follows: Millions of Yen
2018 2017 Associated companies ………………………………………………… ¥ 176,685 ¥ 86,489 Joint ventures ………………………………………………………… 111,789 57,042 Total ………………………………………………………………… ¥ 288,474 ¥ 143,531
The carrying value of the investments accounted for using the equity method exceeded the companies’ equity in the underlying net assets of those companies. The amounts of such excess value for the years ended March 31, 2018 and 2017 were as follows: Millions of Yen
2018 2017 Associated companies ………………………………………………… ¥ 254,620 ¥ 332,183 Joint ventures ………………………………………………………… 144,548 121,949 Total ………………………………………………………………… ¥ 399,168 ¥ 454,132
The amount of excess value is attributed first to certain fair value adjustments on a net-of-tax basis at the time of the initial and subsequent investments in those companies with the remaining portion considered as equity method goodwill. The fair value adjustments mainly relate to property, plant and equipment, intangible assets which consist primarily of equipment and fixtures, mineral rights and customer relationship amortized over their respective estimated useful lives using either the straight-line or the unit- of-production method.
Investments in common stock of publicly-traded associated companies include marketable equity securities carried at ¥280,772 million and ¥281,780 million at March 31, 2018 and 2017, respectively. Corresponding aggregate quoted market values were ¥504,297 million and ¥478,684 million, respectively. There was no investment in common stock of publicly-traded joint venture.
The amounts of impairment losses on investments in equity accounted investees for the years ended March 31, 2018 and 2017 were ¥14,419 million and ¥616 million, respectively, and included in "Gain(loss) on securities and other investments - net" in the Consolidated Statement of Income.
129 For the year ended March 31, 2018, the Company recognized the reversal of impairment loss of ¥956 million of investments accounted for using the equity method due to recovery of market prices in "Gain (loss) on securities and other investments - net" in the Consolidated Statement of Income. For the year ended March 31, 2017, there was no reversal of impairment loss.
The amounts of outstanding balances of assets and liabilities in the equity accounted investees for the years ended March 31, 2018 and 2017 were as follows: The assets mainly consisted of trade receivables, loans and other investments and the liabilities mainly consisted of trade payables and loans payable. Millions of Yen
2018 2017
Assets Liabilities Assets Liabilities Associated companies ……………………………… ¥ 151,499 ¥ 69,924 ¥ 226,947 ¥ 76,087 Joint ventures ……………………………………… 183,171 55,969 152,135 44,230 Total ……………………………………………… ¥ 334,670 ¥ 125,893 ¥ 379,082 ¥ 120,317
In relation to the Company’s liquefaction business in the United States, a wholly-owned subsidiary of the Company has secured four million tons per annum of LNG tolling capacity for 20 years following the inception of production of LNG scheduled for 2019, for which it will pay a tolling service fee under a natural gas tolling liquefaction agreement with Cameron LNG LLC, a subsidiary of Cameron LNG Holdings LLC, an associate of the Company. The Company has completed the procurement of seven LNG ships intended to be used for the delivery of LNG mainly to its customers in Japan. Among the time charter contracts for the seven ships, three ships including contracts for one ship with ship-owning companies in which the Company has investments accounted for as joint ventures, have a total maximum charter period of 25 years starting from 2018, and the remaining four ships including contracts for one ship with ship-owning companies in which the Company has investments accounted for as joint ventures, have a total maximum charter period of 25 years starting from 2019. The total maximum hire amount for the seven ships is approximately ¥615 billion. Corresponding to most of the costs from the above tolling and transportation contracts, the Company also entered into long term LNG sales contracts with customers mainly in Japan.
The companies’ revenues and purchases in cost of revenues from the equity accounted investees for the years ended March 31, 2018 and 2017 were as follows: Millions of Yen
2018 2017 Revenues ……………………………………………………………… Associated companies ……………………………………………… ¥ 57,317 ¥ 54,064 Joint ventures ……………………………………………………… 2,320 2,982 Total ……………………………………………………………… ¥ 59,637 ¥ 57,046 Purchases ……………………………………………………………… Associated companies ……………………………………………… ¥ 76,605 ¥ 70,425 Joint ventures ……………………………………………………… 47,869 39,391 Total ……………………………………………………………… ¥ 124,474 ¥ 109,816
7. SEGMENT INFORMATION
IFRS 8 “Operating Segments” requires disclosure of financial and descriptive information regarding operating segments, which are components of an entity whose operating results are regularly reviewed by the entity’s chief operating decision-maker in deciding resources to be allocated to the segments and assessing their performance.
The Company is operated through business units, determined based on their products and services, which plan overall and worldwide strategies for their products and services and conduct their worldwide operations. The business units also collaborate with the regional business units in planning and executing their strategies for products and regions. The regional business units are delegated the business of their regions as the centers of each particular regional strategy and operate diversified businesses together with their affiliated companies in collaboration with the business units. Since the year ended March 31, 2018, the components of deciding 130 resources to be allocated to the segments and assessing their performance by the Company’s chief operating decision-maker have been changed to the components where the regional business units were consolidated by the products and services. As a result of the change, the companies’ operating segments become product operating segments comprised of the business units of the Head Office where the regional business units were consolidated by the products and services.
The companies’ operating segments have been aggregated into reportable segments based on the similarities in the nature of the products and services, the production processes, the type of customer, the methods used for distribution, and the regulatory environments surrounding their businesses, along with the similarities in the economic characteristics based on the profitability indicators using Gross Profit, Profit (Loss) for the Year Attributable to Owners of the parent, etc.
Due to the above change in the companies’ operating segments, since the year ended March 31, 2018, the previous 10 reportable segments that include 7 product segments of “Iron & Steel Products”, “Mineral & Metal Resources”, “Machinery & Infrastructure”, “Chemicals”, “Energy”, “Lifestyle” and “Innovation & Corporate Development” along with 3 regional segments of “Americas”, “Europe, the Middle East and Africa” and “Asia Pacific”, have been changed to 7 reportable segments of “Iron & Steel Products”, “Mineral & Metal Resources”, “Machinery & Infrastructure”, “Chemicals”, “Energy”, “Lifestyle” and “Innovation & Corporate Development”, where the regional segments were consolidated by product segment. In addition, part of each of the regional segments have been consolidated into “All Other”. In accordance with these changes, the segment information for the year ended March 31, 2017 has been restated to conform to the current period presentation.
The reportable segments (including the regional business units consolidated by the product and service) of the Company are as follows:
“Iron & Steel Products” consists of the Iron & Steel Products Business Unit. This segment manufactures, sells and trades iron & steel products in Japan and abroad.
“Mineral & Metal Resources” consists of the Mineral & Metal Resources Business Unit. This segment is engaged in overseas development of iron and non-ferrous metal resources, and produces, sells and trades raw materials and metal products in Japan and abroad.
“Machinery & Infrastructure” consists of the Infrastructure Projects Business Unit, the Integrated Transportation Systems Business Unit I and the Integrated Transportation Systems Business Unit II. This segment is engaged in manufacturing, sales and trading, leasing and financing of plant and machinery, as well as infrastructure businesses such as power generation in Japan and abroad.
“Chemicals” consists of the Basic Materials Business Unit, the Performance Materials Business Unit, and the Nutrition & Agriculture Business Unit. This segment manufactures, sells and trades chemical products in Japan and abroad.
“Energy” consists of the Energy Business Units I and II. This segment is engaged in overseas development of oil and gas resources, and manufactures, sells and trades oil, gas, coal and related products in Japan and abroad.
“Lifestyle” consists of the Food Business Unit, the Food & Retail Business Unit, the Healthcare & Service Business Unit and the Consumer Business Unit. This segment manufactures, sells, and trades foods, consumer products and materials, and engages in healthcare, real estate and service businesses in Japan and abroad.
“Innovation & Corporate Development” consists of the IT & Communication Business Unit and the Corporate Development Business Unit. This segment engages in information and communication, logistics, insurance, finance and media businesses in Japan and abroad.
131 The companies’ operating segment information and geographic area information for the years ended March 31, 2018 and 2017 were as follows:
Segment information Millions of Yen Iron & Mineral & Innovation & Year ended Steel Metal Machinery & Corporate March 31, 2018: Products Resources Infrastructure Chemicals Energy Lifestyle Development Total Revenue...... ¥ 238,240 ¥ 946,369 ¥ 447,088 ¥ 1,186,673 ¥ 534,293 ¥ 1,409,378 ¥ 127,326 ¥ 4,889,367 Gross Profit...... ¥ 41,874 ¥ 206,767 ¥ 121,943 ¥ 136,573 ¥ 96,808 ¥ 139,533 ¥ 45,084 ¥ 788,582 Share of Profit (Loss) of Investments Accounted for Using the Equity Method.... ¥ 13,349 ¥ 61,806 ¥ 96,525 ¥ 11,318 ¥ 24,544 ¥ 22,842 ¥ 5,040 ¥ 235,424 Profit (Loss) for the Period Attributable to Owners of the parent...... ¥ 24,728 ¥ 257,617 ¥ 89,617 ¥ 34,235 ¥ 48,601 ¥ (26,340) ¥ (4,637) ¥ 423,821 Total Assets at
March 31, 2018...... ¥ 654,725 ¥ 2,092,908 ¥ 2,255,650 ¥ 1,186,254 ¥ 1,917,687 ¥ 1,901,822 ¥ 622,709 ¥ 10,631,755 Investments accounted for using the equity method at March 31, 2018...... ¥ 217,775 ¥ 431,682 ¥ 880,206 ¥ 117,401 ¥ 254,264 ¥ 452,881 ¥ 151,367 ¥ 2,505,576 Core Operating Cash Flow...... ¥ 14,179 ¥ 240,829 ¥ 158,846 ¥ 50,174 ¥ 175,282 ¥ 7,118 ¥ 3,061 ¥ 649,489 Capital additions to
Non-current assets...... ¥ 982 ¥ 29,676 ¥ 8,836 ¥ 21,474 ¥ 76,622 ¥ 39,246 ¥ 3,040 ¥ 179,876 Depreciation and amortization ¥ 1,237 ¥ 36,534 ¥ 16,701 ¥ 19,671 ¥ 92,534 ¥ 14,759 ¥ 4,144 ¥ 185,580
Millions of Yen Adjustments Year ended and Consolidated March 31, 2018: All Other Eliminations Total Revenue...... ¥ 1,937 ¥ 845 ¥ 4,892,149 Gross Profit...... ¥ 1,278 ¥ 845 ¥ 790,705 Share of Profit (Loss) of Investments Accounted for Using the Equity Method.... ¥ (116) ¥ (367) ¥ 234,941 Profit (Loss) for the Period Attributable to Owners of the parent...... ¥ 2,469 ¥ (7,811) ¥ 418,479 Total Assets at
March 31, 2018...... ¥ 6,239,888 ¥ (5,564,983) ¥ 11,306,660 Investments accounted for using the equity method at March 31, 2018...... ¥ 219 ¥ (2,801) ¥ 2,502,994 Core Operating Cash Flow...... ¥ 8,558 ¥ 8,440 ¥ 666,487 Capital additions to
Non-current assets...... ¥ 17,592 ¥ – ¥ 197,468 Depreciation and amortization ¥ 7,007 ¥ – ¥ 192,587
132
Millions of Yen
Iron & Mineral & Innovation & Year ended Steel Metal Machinery & Corporate March 31, 2017 Products Resources Infrastructure Chemicals Energy Lifestyle Development Total (As restated): Revenue...... ¥ 202,406 ¥ 746,406 ¥ 408,504 ¥ 1,037,284 ¥ 463,601 ¥ 1,378,263 ¥ 125,226 ¥ 4,361,690 Gross Profit...... ¥ 36,724 ¥ 176,786 ¥ 114,452 ¥ 145,611 ¥ 63,885 ¥ 136,179 ¥ 44,988 ¥ 718,625 Share of Profit (Loss) of Investments Accounted for Using the Equity Method.... ¥ 11,129 ¥ 48,468 ¥ 64,341 ¥ 3,880 ¥ 17,090 ¥ 24,085 ¥ 2,077 ¥ 171,070 Profit (Loss) for the Period Attributable to Owners of the parent...... ¥ 10,853 ¥ 144,314 ¥ 66,806 ¥ 32,653 ¥ 31,679 ¥ 25,382 ¥ 10,975 ¥ 322,662 Total Assets at
March 31, 2017...... ¥ 612,632 ¥ 1,962,236 ¥ 2,238,142 ¥ 1,175,205 ¥ 1,905,252 ¥ 1,723,399 ¥ 611,395 ¥ 10,228,261 Investments accounted for using the equity method at March 31, 2017...... ¥ 208,839 ¥ 711,039 ¥ 893,122 ¥ 111,692 ¥ 254,573 ¥ 399,369 ¥ 163,583 ¥ 2,742,217 Core Operating Cash Flow...... ¥ 8,617 ¥ 202,136 ¥ 74,432 ¥ 53,771 ¥ 134,109 ¥ 8,378 ¥ 6,109 ¥ 487,552 Capital additions to
Non-current assets...... ¥ 1,239 ¥ 21,110 ¥ 9,242 ¥ 25,399 ¥ 68,403 ¥ 31,012 ¥ 3,827 ¥ 160,232 Depreciation and amortization ¥ 1,051 ¥ 32,834 ¥ 17,944 ¥ 17,566 ¥ 96,955 ¥ 14,682 ¥ 4,614 ¥ 185,646
Millions of Yen
Adjustments Year ended and Consolidated March 31, 2017 All Other Eliminations Total (As restated): Revenue...... ¥ 1,908 ¥ 371 ¥ 4,363,969 Gross Profit...... ¥ 299 ¥ 371 ¥ 719,295 Share of Profit (Loss) of Investments Accounted for Using the Equity Method.... ¥ (106) ¥ (395) ¥ 170,569 Profit (Loss) for the Period Attributable to Owners of the parent...... ¥ (2,888) ¥ (13,638) ¥ 306,136 Total Assets at
March 31, 2017...... ¥ 5,798,648 ¥ (4,525,896) ¥ 11,501,013 Investments accounted for using the equity method at March 31, 2017...... ¥ 113 ¥ (589) ¥ 2,741,741 Core Operating Cash Flow...... ¥ 16,394 ¥ (9,100) ¥ 494,846 Capital additions to
Non-current assets...... ¥ 31,240 ¥ – ¥ 191,742 Depreciation and amortization ¥ 7,683 ¥ – ¥ 193,329
133
(Notes) 1. “All Other” principally consisted of the Corporate Staff Unit which provides financing services and operations services to external customers and/or to the companies and affiliated companies. Total assets of “All Other” at March 31, 2018 and 2017 consisted primarily of cash and cash equivalents and time deposits related to financing activities, and assets of the Corporate Staff Unit and certain subsidiaries related to the above services. A capital expenditure for the integrated development project in 2, Ohtemachi 1-Chome Distinct is included in Capital additions to Non-current assets. 2. Transfers between reportable segments are made at cost plus a markup. 3. The amounts in “Adjustments and Eliminations” for Profit (Loss) for the Year Attributable to Owners of the parent include income and expense items that are not allocated to specific reportable segments, and eliminations of intersegment transactions. 4. Since the year ended March 31, 2018, Core Operating Cash Flow has been identified as the performance indicator that is more important than EBITDA, therefore, Core Operating Cash Flow has been disclosed by reportable segments instead of EBITDA. Core Operating Cash Flow is calculated by eliminating the sum of the “Changes in Operating Assets and Liabilities” from “Cash Flows from Operating Activities” as presented in the Consolidated Statements of Cash Flows. 5. Previously, there was a difference between the Company's actual income taxes and the reportable segments' income taxes that were calculated using the internal tax rate and the difference was included in the “Adjustments and Eliminations”. Since the year ended March 31, 2018, the internal tax rate has been made the same as the external tax rate. In addition, since the year ended March 31, 2018, the scope of allocation of expenses incurred at Corporate Staff Unit to reportable segments was reviewed, and part of the expenses which were previously allocated to the reportable segments have been excluded from the scope of allocation. 6. Previously, the profit and loss of consolidated subsidiaries that are jointly held by numerous operating segments were allocated from the supervising to non-supervising operating segments based on the profit share of each of the segments using the Share of Profit (Loss) of Investments Accounted for Using the Equity Method and Income for the Period Attributable to Non-controlling Interests. Since the year ended March 31, 2018, these allocations are made based on the profit share of each of the segments in each of the accounts disclosed in the segment information to reflect the performance of the operating segments more properly. 7. In accordance with the changes in 4-6 above, the segment information for the year ended March 31, 2017 has been restated to conform to the current period presentation. 8. Profit (Loss) for the Period Attributable to Owners of the parent of each operating segment during the year ended March 31, 2018 include the following impacts, mainly due to the reversal of deferred tax assets and liabilities which reflect the lower federal corporate income tax rate set by the "Tax Cuts and Jobs Act" in the US enacted on December 22, 2017. The following includes impact to "Income taxes" which is disclosed in Note 23, "Share of Profit (Loss) of Investment Accounted for Using Equity Method" and other accounts.
Millions of Yen Iron & Mineral & Innovation & Year ended Steel Metal Machinery & Corporate March 31, 2018: Products Resources Infrastructure Chemicals Energy Lifestyle Development Total Profit (Loss) for the Period Attributable to Owners of the parent...... ¥ 3,292 ¥ – ¥ 4,272 ¥ 7,266 ¥ (18,268) ¥ 2,985 ¥ (85) ¥ (538)
Millions of Yen Adjustments Year ended and Consolidated March 31, 2018: All Other Eliminations Total Profit (Loss) for the Period Attributable to Owners of the parent...... ¥ 13,465 ¥ – ¥ 12,927
134 Geographic area information Millions of Yen
United Consolidated
Japan States Australia Singapore All Other Total Year ended March 31, 2018: Revenue ………………………… ¥ 2,271,982 ¥ 898,539 ¥ 458,436 ¥ 268,935 ¥ 994,257 ¥ 4,892,149 Year ended March 31, 2017: Revenue ………………………… ¥ 1,948,234 ¥ 912,434 ¥ 400,101 ¥ 241,340 ¥ 861,860 ¥ 4,363,969 Note: Revenues are attributed to countries based on the location of sellers.
Millions of Yen
United Consolidated
Australia States Japan Italy Thailand All Other Total At March 31, 2018: Non-current assets ………… ¥ 525,798 ¥ 449,730 ¥ 408,382 ¥ 194,192 ¥ 123,415 ¥ 448,265 ¥2,149,782 At March 31, 2017: Non-current assets ………… ¥ 550,335 ¥ 456,147 ¥ 384,156 ¥ 196,866 ¥ 171,359 ¥ 437,482 ¥2,232,345 Note: Financial instruments and deferred tax assets are excluded from Non-current assets. There were no individual material customers with respect to revenues for the years ended March 31, 2018 and 2017.
135 8. RECEIVABLES AND RELATED ALLOWANCES
Changes in allowance for doubtful receivables
The analysis of the changes in allowance for doubtful receivables for the years ended March 31, 2018 and 2017 is as follows. The allowance for doubtful receivables shown in the following table includes those for short-term trade receivables. Millions of Yen
Year ended March 31, 2018: Corporate Businesses Retail Finance Business Total Balance at beginning of year ……………… ¥ 39,199 ¥ 6,166 ¥ 45,365 Credits charged off ……………………… (6,388) (6,066) (12,454) Provision for doubtful receivables*……… 19,230 5,846 25,076 Others** ………………………………… (148) (276) (424) Balance at end of year …………………… ¥ 51,893 ¥ 5,670 ¥ 57,563 *Mitsui Bussan Copper Investment & Co., Ltd., a subsidiary in the Mineral & Metal Resources Segment, recognized an impairment loss of ¥18,590 million related to SCM Minera Lumina Copper Chile, an equity-method affiliate, which Mitsui Bussan Copper Investment & Co., Ltd. and MLCC Finance Netherlands B.V., an equity-method affiliate, have investment and loan for. The impairment loss was driven by update in the revision of the long-term copper production program and operational situation. Out of ¥ 18,590 million, ¥ 14,722 million loss is included in Provision for doubtful receivables under “Selling, General and Administrative Expenses” and ¥ 3,868 million loss is included in “Share of Profit (Loss) of Investments Accounted for Using the Equity Method” respectively. ** “Others” principally includes the effect of changes in foreign exchange rates.
Millions of Yen
Year ended March 31, 2017: Corporate Businesses Retail Finance Business Total Balance at beginning of year ……………… ¥ 37,517 ¥ 6,088 ¥ 43,605 Credits charged off ……………………… (1,575) (6,516) (8,091) Provision for doubtful receivables ……… 2,614 6,558 9,172 Others* ………………………………….. 643 36 679 Balance at end of year …………………… ¥ 39,199 ¥ 6,166 ¥ 45,365 * “Others” principally includes the effect of changes in foreign exchange rates.
Credit quality indicators
The companies engaged in businesses with corporate customers (“corporate businesses”) assess and monitor receivables every quarter by classifying the receivables into two categories, performing receivables and nonperforming receivables. Certain receivables are classified as nonperforming receivables in accordance with an internal guideline for managing receivables. Receivables from counterparties that meet any of the following conditions are classified as nonperforming receivables;
1) Counterparties who have filed a petition for liquidation, adjustments, rehabilitation or reorganization under the Bankruptcy Act.
2) Counterparties experiencing suspension or discontinuance of business, as well as those who have found it impossible or extremely difficult to fulfill their payments or deliveries due to deficits in equity or insolvency for a considerable period without prospects for business improvement, and also those who have suffered from tremendous losses due to natural disasters, sudden changes in economic conditions, or similar catastrophes.
3) Counterparties from which amounts due have been outstanding for more than one year.
The companies classify receivables other than nonperforming receivables as performing receivables. Companies engaged in financial business with retail customers (“retail finance business”) assess and monitor receivables every quarter by number of days past due.
136 The amounts of recorded investments in receivables classified by Credit Quality Indicators as of March 31, 2018 and 2017 were as follows:
Corporate Businesses Millions of Yen
2018 2017 Performing …………………………………………………………… ¥ 2,207,151 ¥ 2,265,138 Nonperforming ………………………………………………………… 37,676 33,173 Total ………………………………………………………………… ¥ 2,244,827 ¥ 2,298,311
Retail Finance Business Millions of Yen
2018 2017 Less than 30 days past due (including not past due) ………………… ¥ 113,005 ¥ 115,261 30 days or more past due ……………………………………………… 8,492 8,704 Total ………………………………………………………………… ¥ 121,497 ¥ 123,965
Receivables that are past due, but not impaired
The age analysis of receivables that are past due but not impaired as of March 31, 2018 and 2017 is as follows. The amounts of receivables of the companies engaged in retail finance business that are past due but not impaired were immaterial.
Corporate Businesses Millions of Yen
2018 2017 Less than 90 days past due …………………………………………… ¥ 73,237 ¥ 47,485 90 days or more past due ……………………………………………… 16,768 14,418 Total ………………………………………………………………… ¥ 90,005 ¥ 61,903
Impaired receivables
The amounts of recorded investments in impaired receivables as of March 31, 2018 and 2017 were as follows. The carrying amounts of individually impaired receivables in the retail finance business were immaterial.
Corporate Businesses Millions of Yen
2018 2017
Receivable Allowance Receivable Allowance With allowance for doubtful accounts ¥ 53,401 ¥ 46,992 ¥ 54,463 ¥ 30,087 Without allowance for doubtful accounts …………… 757 - 376 - Total ……………………………………………… ¥ 54,158 ¥ 46,992 ¥ 54,839 ¥ 30,087
137 9. DISCLOSURES ABOUT FINANCIAL INSTRUMENTS AND RELATED MATTERS
(1) Trade and other receivables, and other financial assets
Trade and other receivables, and other financial assets as of March 31, 2018 and 2017 were measured at amortized cost and FVTPL, except for derivative assets, and consisted of the following: Millions of Yen
2018 2017 Current Trade and other receivables Accounts and notes ………………………………………………… ¥ 1,566,101 ¥ 1,516,547 Lease receivables…………………………………………………… 9,967 11,704 Loans ……………………………………………………………… 92,510 101,275 Receivables from equity accounted investees ……………………… 105,995 120,200 Other financial assets Time deposits ……………………………………………………… 6,325 15,640 Accounts receivable-other ………………………………………… 84,823 95,926 Derivative assets …………………………………………………… 105,018 101,811 Other ………………………………………………………………… 47,749 54,303 Allowances for doubtful receivables ………………………………… ¥ (8,556) ¥ (10,324) Total ……………………………………………………………… ¥ 2,009,932 ¥ 2,007,082 Non-current Trade and other receivables Accounts and notes ………………………………………………… ¥ 30,162 ¥ 35,168 Lease receivables …………………………………………………… 56,307 72,707 Loans ……………………………………………………………… 199,710 207,587 Receivables from equity accounted investees ……………………… 162,907 196,682 Other financial assets Time deposits ……………………………………………………… 922 732 Accounts receivable-other ………………………………………… 11,466 7,906 Derivative assets …………………………………………………… 102,710 98,276 Other ………………………………………………………………… 38,051 38,405 Allowances for doubtful receivables ¥ (49,007) ¥ (35,041) Total ……………………………………………………………… ¥ 553,228 ¥ 622,422 Note: "Non-current Loans" includes a loan to equity method investee/associate whose interest payment is based on its borrower's performance. It is measured at FVTPL, whose carrying amount is on the notes No.24.
(2) Other investments
The carrying amounts of other investments as of March 31, 2018 and 2017 were as follows: Millions of Yen
2018 2017 Other investments Financial assets measured at FVTPL ……………………………… ¥ 135,601 ¥ 107,784 Financial assets measured at FVTOCI ……………………………… 1,685,437 1,225,167 Amortized cost ……………………………………………………… 3,988 4,213 Total ……………………………………………………………… ¥ 1,825,026 ¥ 1,337,164 Note: Preferred stock issued by equity method investees, which was included in financial assets measured at FVTOCI as of March 31, 2018 and 2017, were ¥44,088 million and ¥41,532 million, respectively.
138 Financial assets measured at FVTOCI which were included in other investments The fair value of financial assets measured at FVTOCI as of March 31, 2018 and 2017 were as follows: Millions of Yen
2018 2017 Marketable …………………………………………………………… ¥ 1,046,586 ¥ 579,133 Non-marketable ……………………………………………………… 638,851 646,034 Total ………………………………………………………………… ¥ 1,685,437 ¥ 1,225,167
The fair value of major items of these marketable financial assets measured at FVTOCI as of March 31, 2018 and 2017 were as follows: Millions of Yen
2018 2017 VALE S.A. ¥ 388,377 ¥ - Seven & i Holdings Co., Ltd. 74,363 71,145 Recruit Holdings Co., Ltd. 71,402 51,120 INPEX CORPORATION 43,328 43,949 Sims Metal Management Ltd. 39,444 35,490 NIPPON STEEL & SUMIKIN BUSSAN CORPORATION 29,914 15,833 Yamaha Motor Co., Ltd. 27,303 23,019 MODEC, INC. 22,302 19,853 GOLDWIN INC. 13,932 6,387 TORAY INDUSTRIES, INC. 13,865 13,597 YAMATO KOGYO CO., LTD. 13,499 13,134 TOKYO BROADCASTING SYSTEM HOLDINGS, INC. 12,968 15,290 KATO SANGYO CO., LTD 11,745 9,005 Mitsui Chemicals, Inc 11,658 9,556 TOYOTA MOTOR CORPORATION 10,238 9,127 Synlait Milk Ltd. 9,458 3,576 PT PELAT TIMAH NUSANTARA,TBK 9,447 5,702 Mitsui Fudosan Co., Ltd. 7,745 7,122 J-OIL MILLS, INC. 7,624 8,821 Sumitomo Metal Mining Co., Ltd. 6,514 4,605
Non-marketable financial assets measured at FVTOCI were mainly composed of investments in six LNG projects (Sakhalin II, Qatargas 1, Abu Dhabi, Oman, Qatargas 3 and Equatorial Guinea) and mineral & metal resources projects, including the Jimblebar iron ore project. The fair value of investments in the six LNG projects as of March 31, 2018 and 2017 were ¥334,591 million and ¥352,656 million, respectively. The fair value of the main investments in the mineral & metal resources projects, including the Jimblebar iron ore project, as of March 31, 2018 and 2017 were ¥93,549 million and ¥80,042 million, respectively.
Derecognized financial assets measured at FVTOCI The fair value, gains and losses, and dividends income related to financial assets measured at FVTOCI which were derecognized because of review of business strategy as of March 31, 2018 and 2017 were as follows: Millions of Yen
2018 2017 Fair value of the financial assets at the date of derecognition ¥ 42,434 ¥ 108,498 Cumulative gains and losses on disposition ¥ 15,985 ¥ 26,543 Dividends received from derecognized financial assets ¥ 2,115 ¥ 1,997
139 With respect to financial assets measured at FVTOCI, gains and losses on disposition (after income tax effect) recorded as other components of equity at the date of derecognition were transferred to retained earnings. The amounts transferred were ¥10,111 million and ¥16,987 million for the years ended March 31, 2018 and 2017, respectively.
(3) Gain (loss) on securities and other investments-net
Gain (loss) on securities and other investments-net for the years ended March 31, 2018 and 2017 that the companies recognized were as follows: Millions of Yen
2018 2017 Gain (loss) on securities and other investments-net Financial assets measured at FVTPL ……………………………… ¥ - ¥ 1,924 Subsidiaries and associated companies ………………………… 55,146 63,038 Total ……………………………………………………………… ¥ 55,146 ¥ 64,962 Gains (losses) related to financial assets measured at FVTPL ("FVTPL gains (losses)") for the year ended March 31, 2017 were included in “Gain (loss) on securities and other investments—net” and FVTPL gains (losses) for the year ended March 31, 2018 were ¥(1,850) million included in “Other revenue” in the Consolidated Statements of Income.
(4) Finance income and costs
The finance income and finance costs for the years ended March 31, 2018 and 2017 that the companies recognized were as follows: Millions of Yen
2018 2017 Interest income Amortized cost ……………………………………………………… ¥ 38,936 ¥ 38,891 Derivatives ………………………………………………………… (2,420) (3,986) Total ……………………………………………………………… ¥ 36,516 ¥ 34,905 Dividend income Financial assets measured at FVTOCI …………………………… ¥ 84,793 ¥ 50,719 Financial assets measured at FVTPL ……………………………… - 1,155 Total ……………………………………………………………… ¥ 84,793 ¥ 51,874 Interest expense Amortized cost ……………………………………………………… ¥ (68,174) ¥ (63,978) Derivatives ………………………………………………………… 1,686 6,981 Total ……………………………………………………………… ¥ (66,488) ¥ (56,997)
In addition to those shown in the table above, interest income of ¥30,771 million and ¥31,562 million on financial assets measured at amortized cost were included in “Other revenue” and interest expenses of ¥8,465 million and ¥8,990 million on financial liabilities measured at amortized cost were included in “Cost of other revenue” for the years ended March 31, 2018 and 2017, respectively, mainly related to the retail finance business. Fee income and expenses arising from financial assets measured at amortized cost are immaterial. Dividend income measured at FVTPL for the year ended March 31, 2017 was included in “Dividend income” and Dividend income measured at FVTPL for the year ended March 31, 2018 was ¥616 million included in “Other revenue” in the Consolidated Statements of Income.
140 (5) Fair value of non-current financial assets and liabilities
The fair values of non-current receivables with floating rates, including long-term loans receivable, and long-term debt with floating rates approximate their respective carrying amounts. The fair values of non-current receivables with fixed rates and long-term debt with fixed rates are estimated by discount cash flow analysis, using interest rates currently available for similar types of loans, accounts receivable and borrowings with similar terms and remaining maturities. The fair values of financial instruments as of March 31, 2018 and 2017 were as follows. The fair values of current financial assets and current financial liabilities are not disclosed because the carrying amounts reasonably approximate their fair values. Millions of Yen
2018 2017
Carrying Fair Carrying Fair
amount value amount value Non-current receivables Trade and other receivables and other financial assets (*).………… ¥ 553,228 ¥ 553,483 ¥ 622,422 ¥ 622,943 Non-current liabilities Long-term debt, less current portion and other financial ¥ 3,645,991 ¥ 3,714,586 ¥ 4,219,963 ¥ 4,317,549 liabilities (*) ………………………………………………………… (*) The fair values of other financial assets and other financial liabilities approximate their respective carrying amounts.
Trade and other receivables include loans receivable. Long-term debt includes borrowings and bonds payable. Fair values of trade and other receivables classified as Level 3 were ¥243,173 million and ¥293,444 million as of March 31, 2018 and 2017, respectively. Their valuation is based on significant unobservable inputs such as credit spreads, default probabilities, and estimated loss rates on individual receivables using the discounted cash flow method. Items other than said loans and certain other items are classified as Level 2 as their fair values are measured using the discounted cash flow method based on observable inputs including market interest rates.
(6) Risk-related matters
Capital management The Company decides the policies to maintain appropriate levels of shareholders’ equity, debt and equity balances. It examines the status of execution in terms of stability for capital efficiency as well as financing when the Company acquires high-quality assets to improve enterprise value and utilize existing assets. Shareholders’ equity is the total equity attributable to owners of the parent in the Consolidated Statements of Financial Position. The Company also examines the appropriateness of scale of shareholders’ equity in terms of it being a risk buffer to maximum exposure to potential losses that could result from a deterioration in the companies' respective businesses. The key metrics used for capital management are as follows: ・ Return on equity (ROE) (*) ・ Net Debt-to-Equity Ratio (Net DER) (**) ・ Ratio of risk adjusted assets to shareholder’s equity (***)
(*) ROE refers to the ratio of profit for the year attributable to the owner of the parent to shareholders’ equity. ROEs as of March 31, 2018 and 2017 were 10.9% and 8.6%, respectively.
(**) Net DER refers to the ratio of net interest bearing debt to shareholders’ equity. Net interest bearing debt is calculated by subtracting cash and cash equivalents and time deposits from interest bearing debt. Net DERs as of March 31, 2018 and 2017 were 0.78 times and 0.88 times, respectively.
(***) Risk-adjusted assets refers to the maximum loss exposure and is calculated by multiplying assets including trade and other receivables, other investments and fixed assets by risk weights, which the companies have determined individually based on the potential risk of loss.
141 The Company considers these indicators periodically, and they are used for developing business policy and business judgment. The Company maintains a robust balance sheet and credit rating which is sufficient for business projects. The Company strives to maintain and upgrade its credit rating through the above capital management. The Company is not subject to any externally imposed capital requirements (except for general requirements, such as those in the Companies Act of Japan).
Risk management ・ Credit risk With regard to the contingent characteristics of credit risks included in derivative instruments, some of the derivative instruments used by the Company and certain subsidiaries such as commodity futures, commodity forwards, commodity swaps, and commodity options may include clauses that prescribe changes in the minimum required collateral (margins) or early termination in accordance with the credit ratings of the Company. If the credit ratings of the Company are downgraded, the counterparty will require additional collateral from the Company and certain subsidiaries to cover the whole or part of the amount of the relevant derivative obligations in accordance with such clauses. See Note 8 “RECEIVABLES AND RELATED ALLOWANCES” in the notes to the consolidated financial statements for credit risks of financial instruments other than derivative instruments. Concentration of credit risk in specific regions or customers is minimized as the companies carry out a wide variety of transactions with various customers all over the world. The companies also minimize credit risks of derivative instruments associated with, for example, counterparty defaults by entering into these transactions mainly with reputable international financial institutions with high credit ratings. Therefore, the companies believe that a significant loss arising from these transactions is extremely unlikely. The companies manage credit risks through the management of commitment lines of credit approved by an executive officer and through counterparty monitoring conducted on an ongoing basis. In addition, the companies require collateral and/or other forms of security from counterparties as necessary.
・ Liquidity risk Turmoil in financial markets, a downgrade in our credit ratings or significant changes in the lender or investment policies of our lenders or institutional investors could result in constraints on our fund procurement and an increase in funding costs, and could have an adverse effect on our financial position and liquidity. The companies secure the liquidity required for our smooth operations and maintain the strength and soundness of our balance sheet by holding sufficient cash and cash equivalents, maintaining lines of credit with banks, procuring mainly long-term funds, utilizing financing programs provided by government financing agencies and/or project financing and such so that the companies decrease liquidity risk. The unused lines of credit that the companies can access to meet liquidity needs as of March 31, 2018 and 2017 were ¥1,237,812 million and ¥1,107,863 million respectively.
・ Market risks The companies are subject to market risks associated with fluctuations in interest rates, foreign currency exchange rates, commodity prices, and stock prices that arise in the course of the Company's operating and other activities. The companies have formulated market risk management policies and have established management systems at several levels. In particular, regarding foreign currency exchange risks and commodity price risks, Chief Operating Officers have the primary responsibility of establishing risk management policies that prescribe the setting of limits on positions and losses, as well as prescribing management systems at each business unit. They also have the responsibility of obtaining the approval of our executive officers in charge of risk management, and carrying out management and reporting in accordance with such approval. In addition, risk management sections, which are independent from trading sections, monitor, analyze and evaluate market risks and periodically report to the executive officers in charge. Regarding interest rate risks, the environment surrounding financial markets, the Company’s ratio of assets and liabilities, and the risks of interest rate fluctuations are regularly reported to the executive officers, by whom the risk management policies for interest rate were approved. Stock price risk is managed by analyzing factors of stock price fluctuations.
① Interest rate risk The companies are exposed to interest rate risk arising from floating-rate assets and liabilities. An increase in interest rates may adversely affect the operating results. The companies have entered into interest rate derivative transactions which consist mainly of interest rate swap agreements and interest rate and currency swap agreements to hedge exposures of certain assets and liabilities. The impacts on profit before income taxes for the years ended March 31, 2018 and 2017, assuming a 100 basis point rise in interest rates as of March 31, 2018 and 2017, were ¥(24,686) million and ¥(28,353) million, respectively. These are calculated by multiplying the balance of floating-rate financial instruments held by the companies as of March 31, 2018 and 2017 by 100 basis points without
142 considering future changes in the balance, the effect of exchange rate fluctuations, the diversification effect of the timing of refinancing/interest rate revisions of floating-rate debts, etc., and assuming that all other variables are constant. The items that are considered to be instruments affected by interest rate fluctuations for the purpose of calculating the sensitivity include floating-rate interest-bearing debts/loans, fixed-rate interest-bearing debts/loans that are effectively converted to floating-rate instruments under interest rate swap agreements, deposits and other instruments.
② Foreign currency exchange rate risk The companies are exposed to foreign currency exchange rate risk on receivables and payables denominated in foreign currencies arising from transactions such as purchases and sales of commodities and financial transactions. The companies hedge these risks with forward exchange contracts and currency swaps. For significant long and short net positions denominated in foreign currencies as of March 31, 2018 and 2017, assuming a 1% appreciation of the Yen, the impacts on profit before income taxes would have been ¥(1,101) million from USD, ¥(17) million from BRL and ¥(23) million from AUD as of March 31, 2018 and ¥(612) million from USD, ¥(37) million from BRL and ¥59 million from AUD as of March 31, 2017. Based on the same assumption, the impacts on other comprehensive income would be ¥(245) million from USD and ¥(3,884) million from BRL as of March 31, 2018 and ¥(260) million from USD as of March 31, 2017.The increase of impact on other comprehensive income from BRL is due to the Company's acquisition of Vale shares resulted from the incorporation in Valepar by Vale. Please refer to Note 27 “THE INCORPORATION O VALEPAR S.A.” for further details. The long and short positions denominated in foreign currencies indicate that they are in currencies other than that of the functional currency of each company. In this context, the long positions represent the condition in which certain losses occur due to a decline in the value of the currency, and the short positions represent the condition in which certain gains occur due to an increase in the value of the currency. Foreign currency translation adjustments are not included in the scope of this analysis. In addition, this analysis assumes that all other variables are constant.
③ Commodity price risk As the companies carry out business activities pertaining to commodities such as non-ferrous metals, crude oil and gas, and foods, they are exposed to risks associated with commodity prices. The companies measure the risk of market commodities for which historical price fluctuations have been relatively significant along with actively traded derivatives by using Value at Risk (VaR), which is a statistical measure of the potential maximum loss in the fair value of a given portfolio over a certain holding period and within a certain confidential level. VaR is calculated by mainly using a 10- day holding period and a confidence level of 99%. In addition, the figures do not necessarily take into account correlations between all commodities. VaRs as of March 31, 2018 and 2017 were ¥6,604 million and ¥10,445 million, respectively. The actual results may differ significantly from VaR above as VaR is calculated by using historical fluctuations of each risk component.
④ Stock price risk The companies invest in listed companies to strengthen ties with customers, suppliers and others, as well as to make various types of propositions to the companies in which the companies invest, to pursue operating revenue. These investments are exposed to stock price risks. For investments held as of March 31, 2018 and 2017, the impacts on other comprehensive income arising from changes in the fair values assuming a 10% change in the stock index representative of the markets on which the individual stocks are traded were ¥97,061 million and ¥52,203 million, respectively. The impact on profit before taxes is immaterial.
(7) Derivative instruments and hedging accounting
The companies have early adopted IFRS 9 “Financial Instruments: Hedge Accounting” (amended in November 2013). Therefore, the following disclosure information is in accordance with the requirements of IFRS 7 “Financial Instruments: Disclosures” (amended in November 2013). The risk management policies for each risk category of risk exposure for which hedge accounting is applied are provided in Note 9 “DISCLOSURES ABOUT FINANCIAL INSTRUMENTS AND RELATED MATTERS (6) Risk-related matters”. Regarding foreign currency exchange rate risks and commodity price risks, the companies manage the risk exposure based on limits to positions and losses set by each business unit. Regarding interest rate risks, the companies manage the risk exposure based on approved policies with considering factors such as financial market, asset and debt balances and the risk of interest rate fluctuations.
143
Foreign currency exchange rate risk The companies use derivative instruments, such as foreign exchange forward contracts and currency swap agreements, as hedging instruments for hedge accounting to fix the expected future cash flows from foreign-currency-denominated receivables and payables resulting from selling and purchasing activities in currencies other than the local currency, and long-term financing transactions as part of the companies’ global operations in many countries. The companies also use foreign-currency-denominated debt in order to mainly hedge the foreign currency exposure in the net investment in foreign operations.
Interest rate risk The companies use derivatives, such as interest rate swap agreements, as hedging instruments for hedge accounting to fix the expected future cash flows from long-term financial assets and liabilities with floating interest rates and offset the exposure to changes in the fair value of long-term financial assets and liabilities with fixed interest rates.
Commodity price risk The companies use derivative instruments, such as swap contracts, as hedging instruments for hedge accounting to fix the expected future cash flows from forecasted transactions in marketable commodities.
When applying hedge accounting to address the above risk, the companies confirm that there are economic relationships between the hedged items and the hedging instruments through qualitative and quantitative assessments. Qualitative assessments show whether the critical terms of hedging instruments and hedged items match exactly or are closely aligned. Quantitative assessments show fluctuations of value of hedged item and hedging instrument with the same risk offset each other. Each hedge ratio is determined properly based on an economic relationship between the hedged item and the hedging instrument and the risk management strategy. Expected hedge ineffectiveness including the cases caused by credit risk is immaterial. The decrease in a net investment could cause hedge ineffectiveness in the risk from the foreign currency exchange rate of a net investment in a foreign operation, but the companies manage the risk from the foreign currency exchange rate in order to minimize such hedge ineffectiveness. In the case the companies designate a specific risk component which is decided based on the risk management strategies for each risk category as a hedged item, the risk component is separately identifiable from the hedged item in its entirety for all risks, and changes in the cash flows or the fair value attributable to the change in the risk component is measured with reliability.
The nominal amounts of the hedging instruments as of March 31, 2018 and 2017 were as follows: Billions of Yen
March 31, 2018 March 31, 2017
Hedges of Hedges of the net the net investment investment Fair value Cash flow in a foreign Fair value Cash flow in a foreign Risk category hedges hedges operation hedges hedges operation Foreign currency exchange rate .... ¥ 61 ¥ 239 ¥ 1,301 ¥ 70 ¥ 278 ¥ 1,399 Interest rate ...... 563 408 – 660 452 – Commodity price ...... – 17 – – 25 – Total nominal amounts ...... ¥ 624 ¥ 664 ¥ 1,301 ¥ 730 ¥ 755 ¥ 1,399
144 The effects of hedge accounting on Consolidated Statements of Financial Position
The following tables present Carrying Value of hedging instruments included within the Consolidated Statements of Financial Position as of March 31, 2018 and 2017: Millions of Yen
March 31, 2018 March 31, 2017
Hedges of Hedges of
Line Item in the the net the net
Consolidated investment investment Risk Statements of Fair value Cash flow in a foreign Fair value Cash flow in a foreign category Financial Position hedge hedge operation hedge hedge operation Foreign Other financial assets ¥ 12 ¥ 2,652 ¥ 2,537 ¥ 88 ¥ 3,387 ¥ 2,446 currency - Current exchange Other financial assets – 1,157 671 – 903 7,844 rate ...... - Non-current Interest rate .... Other financial assets – 38 – 366 16 – - Current Other financial assets 57,351 8,402 – 61,731 5,023 – - Non-current Commodity Other financial assets – 7 – – 877 – price ...... - Current Total ...... ¥ 57,363 ¥ 12,256 ¥ 3,208 ¥ 62,185 ¥ 10,206 ¥ 10,290
Millions of Yen
March 31, 2018 March 31, 2017
Hedges of Hedges of
Line Item in the the net the net
Consolidated investment investment Risk Statements of Fair value Cash flow in a foreign Fair value Cash flow in a foreign category Financial Position hedge hedge operation hedge hedge operation Foreign Current portion of ¥ 6,629 ¥ – ¥ 69,412 ¥ 8,299 ¥ – ¥ 108,207 currency long-term debt exchange Other financial 57 2,049 4,088 51 898 2,232 rate ...... liabilities - Current Long-term debt, less 37,202 – 927,075 40,869 – 918,060 current position Other financial liabilities - Non- 69 692 9,917 – 991 7,882 current Interest rate .... Other financial – 33 – – 283 – liabilities - Current Other financial liabilities - Non- – 1,853 – 1,938 2,369 – current Commodity Other financial – 367 – – 895 – price ...... liabilities - Current Other financial liabilities - Non- – 799 – – – – current Total ...... ¥ 43,957 ¥ 5,793 ¥ 1,010,492 ¥ 51,157 ¥ 5,436 ¥ 1,036,381
145 Fair value hedge
The following table presents the carrying amount of the hedged items recognized in the Consolidated Statements of Financial Position as of March 31, 2018 and 2017, and the accumulated amount of fair value hedge adjustments on the hedged items included in the carrying amount of the hedged items recognized in the Consolidated Statements of Financial Position: Millions of Yen
March 31, 2018 March 31, 2017
Accumulated Accumulated amount of fair amount of fair value hedge value hedge
adjustments on adjustments on the
the hedged items hedged items
Line Item in the included in the included in the Consolidated Carrying amount carrying amount Carrying amount carrying amount Statements of of the of the hedged of the of the hedged Risk Category Financial Position hedged items items hedged items items Foreign currency Other investments ¥ 82,971 ¥ 3,387 ¥ 94,884 ¥ 691 exchange rate ...... Current portion of long- – – 5,079 19 term debt Interest rate ...... Current portion of long- – – 53,366 366 term debt Long-term debt, less 619,870 57,325 668,298 61,693 current position
The accumulated amounts of fair value hedge adjustments remaining in the Consolidated Statements of Financial Position as of March 31, 2018 and 2017 for any hedged items that have ceased to be adjusted for hedging gains and losses were immaterial.
Cash flow hedge
The following amounts in the Consolidated Statements of Financial Position as of March 31, 2018 and 2017 were immaterial: - The balances in the cash flow hedge reserve - The balances remaining in the cash flow hedge reserve from any hedging relationships for which hedge accounting is no longer applied
Hedges of net investments in foreign operations
The balance in the foreign currency translation adjustments which were recognized by applying the hedge accounting to reduce the foreign currency exposure in the net investment in foreign operations as of March 31, 2018 and 2017 were ¥(108,065) million and ¥(140,240) million, respectively. The balance in the foreign currency translation adjustments from any hedging relationships for which hedge accounting is no longer applied as of March 31, 2018 and 2017 were immaterial.
146
The effects of hedge accounting on the Consolidated Statements of Income and Comprehensive Income
Fair value hedge
The following table presents the change in value of the hedged items and fair value of hedging instruments used as the basis for recognizing hedge ineffectiveness for the years ended March 31, 2018 and 2017.
Millions of Yen
March 31, 2018 March 31, 2017
Change in fair Change in fair Change in value of Change in value of
value of Hedging value of Hedging Risk category hedged items instruments hedged items instruments Foreign currency exchange rate risk ...... ¥ 1,567 ¥ (1,602) ¥ (875) ¥ 793 Interest rate risk ...... (413) 413 4,633 (4,633)
The following amounts included in the Consolidated Statements of Income and Comprehensive Income for the years ended March 31, 2018 and 2017 were immaterial: - Hedge ineffectiveness recognized in profit for the year.
Cash flow hedge
The following amounts included in the Consolidated Statements of Income and Comprehensive Income for the years ended March 31, 2018 and 2017 were immaterial: - The change in the value of hedged items and fair value of hedging instruments used as the basis for recognizing hedge ineffectiveness. - The hedging gains and losses that were recognized in other comprehensive income. - Hedge ineffectiveness recognized in profit for the year. - The amount reclassified from the cash flow hedge reserve into profit for the year as a reclassification adjustment.
Hedges of net investments in foreign operations
The change in the fair value of hedging instruments used as the basis for recognizing hedge ineffectiveness for the years ended March 31, 2018 and 2017, were ¥43,125 million and ¥104 million, respectively. Of these amounts, ¥42,034 million and ¥2,063 million were recognized in the foreign currency translation adjustments for the years ended March 31, 2018 and 2017, respectively. The change in value of hedged items used as the basis for recognizing hedge ineffectiveness approximated the change in fair value of hedging effectiveinstruments used as the basis for recognizing hedge ineffectiveness.
The following amounts included in the Consolidated Statements of Income and Comprehensive Income for the years ended March 31, 2018 and 2017 were immaterial: - Hedge ineffectiveness recognized in profit for the year. - The amount reclassified from the foreign currency translation adjustments into profit for the year as a reclassification adjustment.
147 (8) Offset of financial assets and liabilities
A financial asset and a financial liability including collateral are offset and the net amount is presented in the Consolidated Statements of Financial Position of the Company when, and only when, the companies currently have a legally enforceable right to set off the recognized amounts as well as intend either to settle on a net basis, or to realize the asset and settle the liability simultaneously.
The following table presents the gross amounts of recognized financial assets and liabilities, amounts of offset, net amounts, amounts not offset despite the existence of a master netting agreement, and exposure on a net basis of derivative assets, derivative liabilities and collateral as of March 31, 2018 and 2017. These amounts of financial assets and liabilities except derivative assets, derivative liabilities and collateral as of March 31, 2018 and 2017 were immaterial.
Millions of Yen
Financial Financial March 31, 2018: Assets Liabilities Gross amounts of recognized financial assets and liabilities ...... ¥ 601,595 ¥ 520,222 Gross amounts of financial assets and liabilities set off in the (364,383) (364,383) Consolidated Statements of Financial Position ...... Net amounts of financial assets and liabilities presented in the 237,212 155,839 Consolidated Statements of Financial Position ...... Related amounts not set off in the Consolidated Statements of (42,083) (42,083) Financial Position (including collateral) ...... Exposure on a net basis ...... ¥ 195,129 ¥ 113,756
Millions of Yen
Financial Financial March 31, 2017: Assets Liabilities Gross amounts of recognized financial assets and liabilities ...... ¥ 558,612 ¥ 466,839 Gross amounts of financial assets and liabilities set off in the (318,446) (318,446) Consolidated Statements of Financial Position ...... Net amounts of financial assets and liabilities presented in the 240,166 148,393 Consolidated Statements of Financial Position ...... Related amounts not set off in the Consolidated Statements of (33,358) (33,358) Financial Position (including collateral) ...... Exposure on a net basis ...... ¥ 206,808 ¥ 115,035
Financial assets are included in Other financial assets of Current and Non-current assets, and financial liabilities are included in Other financial liabilities of Current and Non-current liabilities in Consolidated Statements of Financial Position.
The companies normally have the rights to set off which are enforceable only in the event of default, insolvency or bankruptcy of its customers in relation to its recognized financial assets and liabilities where the requirements to set off are not met.
10. LEASES
Lessor
The companies lease real estate, equipment, rolling stock, ocean transport vessels, aircraft, and others. Certain leases of rolling stock, equipment and others are classified as finance leases, and the net investments are included as part of trade and other receivables in the Consolidated Statements of Financial Position. Other leases are classified as operating leases and the related assets are presented as property, plant and equipment or investment property in the Consolidated Statements of Financial Position.
148 The following is a schedule of future minimum lease payments to be received from finance leases as well as the components of the present value as of March 31, 2018 and 2017: Millions of Yen
The present value of future Gross investment in the lease minimum lease payments to be received
Year ended March 31: 2018 2017 2018 2017 Not later than 1 year ………………………………… ¥ 6,630 ¥ 10,438 ¥ 5,316 ¥ 7,257 Later than 1 year and not later than 5 years ………… 15,138 29,026 13,160 24,829 Later than 5 years …………………………………… 8,200 15,315 3,290 6,207 Total ……………………………………………… ¥ 29,968 ¥ 54,779 ¥ 21,766 ¥ 38,293 Unearned income …………………………………… (8,202) (16,486) The present value of future minimum lease payments ¥ 21,766 ¥ 38,293 to be received ………………………………………
The following is a schedule of future minimum lease payments to be received under noncancellable operating leases as of March 31, 2018 and 2017: Millions of Yen
Year ended March 31: 2018 2017 Not later than 1 year …………………………………………………… ¥ 35,549 ¥ 33,695 Later than 1 year and not later than 5 years …………………………… 78,906 58,929 Later than 5 years ……………………………………………………… 33,153 25,370 Total ………………………………………………………………… ¥ 147,608 ¥ 117,994
Lessee
The companies lease real estate, equipment, ocean transport vessels and others under finance leases. The following is a schedule of minimum lease payments under finance leases as well as components of the present value as of March 31, 2018 and 2017. The following minimum lease payments have not been reduced by minimum sublease payments to be received of ¥30,495 million and ¥33,265 million as of March 31, 2018 and 2017: Millions of Yen
The present value of future Future minimum lease payments minimum lease payments
Year ended March 31: 2018 2017 2018 2017 Not later than 1 year ………………………………… ¥ 7,460 ¥ 8,860 ¥ 7,630 ¥ 6,925 Later than 1 year and not later than 5 years ………… 30,225 30,312 26,879 27,876 Later than 5 years …………………………………… 48,787 51,203 35,032 38,169 Total ……………………………………………… ¥ 86,472 ¥ 90,375 ¥ 69,541 ¥ 72,970 Future financial cost ………………………………… (16,931) (17,405) The present value of future minimum lease ¥ 69,541 ¥ 72,970 payments ……………………………………………
The companies lease real estate, ocean transport vessels, rolling stock, equipment and others under operating leases. Most of the ocean transport vessels and rolling stock under operating leases are subleased to third parties.
149 The following is a schedule of future minimum lease payments under noncancellable operating leases as of March 31, 2018 and 2017. The following minimum lease payments have not been reduced by minimum sublease payments to be received of ¥31,297 million and ¥28,538 million as of March 31, 2018 and 2017: Millions of Yen
Year ended March 31: 2018 2017 Not later than 1 year …………………………………………………… ¥ 28,404 ¥ 31,885 Later than 1 year and not later than 5 years …………………………… 58,919 78,812 Later than 5 years ……………………………………………………… 43,790 53,562 Total ………………………………………………………………… ¥ 131,113 ¥ 164,259
Rental expenses incurred for operating leases for the years ended March 31, 2018 and 2017 were ¥47,307 million and ¥48,813 million, respectively. Sublease rental income for the years ended March 31, 2018 and 2017 was ¥9,551 million and ¥7,411 million, respectively.
11. INVENTORIES
Inventories as of March 31, 2018 and 2017 were comprised of the following: Millions of Yen
2018 2017 Commodities and finished goods ……………………………………… ¥ 467,922 ¥ 505,432 Property for sale ……………………………………………………… 17,377 18,054 Raw materials, work in progress and others …………………………… 65,400 66,053 Total ………………………………………………………………… ¥ 550,699 ¥ 589,539 See Note 24, “FAIR VALUE MEASUREMENT” for the carrying amount of inventories carried at fair value less costs to sell.
12. PROPERTY, PLANT AND EQUIPMENT
The changes in acquisition cost, accumulated depreciation and impairment losses and carrying amount of property, plant and equipment for the years ended March 31, 2018 and 2017 were as follows:
[Acquisition cost] Millions of Yen
Land Equipment
and and Vessels and Mineral Projects in buildings fixtures aircrafts rights progress Total Balance at April 1, 2016 ¥ 833,456 ¥ 2,278,087 ¥ 139,547 ¥ 328,533 ¥ 251,547 ¥ 3,831,170 Additions ………………………… 12,703 37,971 32,622 17,706 127,346 228,348 Disposals ………………………… (6,429) (41,987) (54,526) (1,057) (135) (104,134) Foreign currency translation ……… (772) (8,912) (1,966) (841) (1,263) (13,754) Others …………………………… (11,133) 62,015 5,037 (5,412) (129,954) (79,447) Balance at March 31, 2017 ¥ 827,825 ¥ 2,327,174 ¥ 120,714 ¥ 338,929 ¥ 247,541 ¥ 3,862,183 Additions ………………………… 13,324 37,094 25,691 2,111 154,140 232,360 Disposals ………………………… (14,609) (108,375) (36,318) (8,879) (6,363) (174,544) Foreign currency translation ……… (25,600) (68,262) (4,707) (13,890) (9,820) (122,279) Others …………………………… 13,786 76,742 12,033 4,676 (105,795) 1,442 Balance at March 31, 2018 ¥ 814,726 ¥ 2,264,373 ¥ 117,413 ¥ 322,947 ¥ 279,703 ¥ 3,799,162 "Others" includes transfers from projects in progress to other property, plant and equipment.
150 [Accumulated depreciation and impairment losses] Millions of Yen
Land Equipment
and and Vessels and Mineral Projects in buildings fixtures aircrafts rights progress Total Balance at April 1, 2016 ¥ 260,021 ¥ 1,443,759 ¥ 31,960 ¥ 149,371 ¥ 7,611 ¥ 1,892,722 Depreciation expenses …………… 25,176 139,430 6,961 4,891 – 176,458 Disposals ………………………… (4,148) (15,685) (7,065) – – (26,898) Impairment losses ………………… 1,440 1,209 1,859 689 – 5,197 Foreign currency translation ……… 175 (2,031) (254) (470) (8) (2,588) Others …………………………… 1,535 199 (1,204) 186 (6,916) (6,200) Balance at March 31, 2017 ¥ 284,199 ¥ 1,566,881 ¥ 32,257 ¥ 154,667 ¥ 687 ¥ 2,038,691 Depreciation expenses …………… 25,199 135,826 7,102 7,223 – 175,350 Disposals ………………………… (5,985) (77,803) (7,156) (2,584) (47) (93,575) Impairment losses ………………… 1,754 1,408 1,923 – 4,848 9,933 Foreign currency translation ……… (7,973) (47,265) (768) (7,248) (4) (63,258) Others …………………………… (2,769) 7,481 303 387 (3,278) 2,124 Balance at March 31, 2018 ¥ 294,425 ¥ 1,586,528 ¥ 33,661 ¥ 152,445 ¥ 2,206 ¥ 2,069,265
[Carrying amount] Millions of Yen
Land Equipment
and and Vessels and Mineral Projects in buildings fixtures aircrafts rights progress Total Balance at March 31, 2017 ¥ 543,626 ¥ 760,293 ¥ 88,457 ¥ 184,262 ¥ 246,854 ¥ 1,823,492 Balance at March 31, 2018 ¥ 520,301 ¥ 677,845 ¥ 83,752 ¥ 170,502 ¥ 277,497 ¥ 1,729,897
Impairment losses were recorded as “Impairment reversal (loss) of fixed assets - net” in the Consolidated Statements of Income. The breakdown of impairment losses of fixed assets for the years ended March 31, 2018 and 2017 by segment is as follows:
Millions of Yen
2018 2017 Mineral & Metal Resources …………………………………………… ¥ (248) ¥ (438) Machinery & Infrastructure …………………………………………… (2,783) (1,864) Chemicals ……………………………………………………………… – (48) Energy ………………………………………………………………… (4,884) (1,245) Lifestyle ……………………………………………………………… (2,001) (1,602) Innovation & Corporate Development ………………………………… (17) – Consolidated Total …………………………………………………… ¥ (9,933) ¥ (5,197)
The amounts of commitments for the purchase of property, plant and equipment as of March 31, 2018 were immaterial, and the amounts as of March 31, 2017 were ¥134,568 million.
151 13. INVESTMENT PROPERTY
The acquisition cost, accumulated depreciation and impairment losses, carrying amount and fair value of investment property for the years ended March 31, 2018 and 2017 were as follows.
[Acquisition cost and accumulated depreciation and impairment losses] Millions of Yen Accumulated depreciation
Acquisition cost and impairment losses Balance at April 1, 2016...... ¥ 188,393 ¥ 40,637 Balance at March 31, 2017...... ¥ 217,621 ¥ 37,832 Balance at March 31, 2018...... ¥ 231,192 ¥ 42,239
[Carrying amount and fair value] Millions of Yen Carrying amount Fair value Balance at March 31, 2017...... ¥ 179,789 ¥ 385,203 Balance at March 31, 2018...... ¥ 188,953 ¥ 379,792
The amounts of acquisitions were ¥29,999 million and ¥27,131 million for the years ended March 31, 2018 and 2017, respectively. The amounts of transfers to and from property, plant and equipment for the year ended March 31, 2017 were ¥17,201 million, and the amounts for the year ended March 31, 2018 were immaterial.
Rental income from investment property and direct operating expenses arising from investment property for the years ended March 31, 2018 and 2017 were immaterial.
The fair value of primary investment property as of the end of each reporting period is based on a valuation conducted by independent valuation appraisers, who have recent experience in the locations and categories of the investment property being valued, and have the appropriate and recognized professional qualifications (such as registered appraiser), and is classified as Level 3. The valuation is based on significant unobservable inputs such as estimated rents and discount rates using primarily the income approach and conforms to the standards of the country where the investment property is located.
152 14. INTANGIBLE ASSETS
The changes in acquisition cost, accumulated amortization and impairment losses, and carrying amount of intangible assets for the years ended March 31, 2018 and 2017 were as follows:
[Acquisition cost] Millions of Yen
Goodwill Software Others Total Balance at April 1, 2016 ¥ 111,316 ¥ 82,522 ¥ 132,104 ¥ 325,942 Additions …………………………………………… 577 7,232 25,300 33,109 Disposals …………………………………………… (1,237) (9,860) (9,070) (20,167) Foreign currency translation ………………………… (320) (68) (651) (1,039) Others ……………………………………………… 303 295 156 754 Balance at March 31, 2017 ¥ 110,639 ¥ 80,121 ¥ 147,839 ¥ 338,599 Additions …………………………………………… 18,085 6,865 6,304 31,254 Disposals …………………………………………… (1,553) (8,189) (3,852) (13,594) Foreign currency translation ………………………… (3,571) (852) (2,991) (7,414) Others ……………………………………………… (176) 1,084 6,642 7,550 Balance at March 31, 2018 ………………………… ¥ 123,424 ¥ 79,029 ¥ 153,942 ¥ 356,395
[Accumulated amortization and impairment losses] Millions of Yen
Goodwill Software Others Total Balance at April 1, 2016 ¥ 42,083 ¥ 55,965 ¥ 70,444 ¥ 168,492 Amortization expense ……………………………… - 9,361 5,062 14,423 Impairment losses …………………………………… 63 6 529 598 Disposals …………………………………………… (411) (9,000) (3,925) (13,336) Foreign currency translation ………………………… (35) (5) (374) (414) Others ……………………………………………… 425 119 (385) 159 Balance at March 31, 2017 ¥ 42,125 ¥ 56,446 ¥ 71,351 ¥ 169,922 Amortization expense ……………………………… - 8,166 5,241 13,407 Impairment losses …………………………………… 6,437 885 4,754 12,076 Disposals …………………………………………… - (7,640) (2,501) (10,141) Foreign currency translation ………………………… (919) (547) (1,571) (3,037) Others ……………………………………………… - 690 271 961 Balance at March 31, 2018 ………………………… ¥ 47,643 ¥ 58,000 ¥ 77,545 ¥ 183,188
[Carrying amount] Millions of Yen
Goodwill Software Others Total Balance at March 31, 2017 ………………………… ¥ 68,514 ¥ 23,675 ¥ 76,488 ¥ 168,677 Balance at March 31, 2018 ………………………… ¥ 75,781 ¥ 21,029 ¥ 76,397 ¥ 173,207
153 Amortization expense on intangible assets with finite estimated useful lives was mainly recognized in “Selling, general and administrative expenses” in the Consolidated Statements of Income. Impairment losses and reversal of impairment losses on intangible assets are recognized in “Impairment reversal (loss) of fixed assets - net” in the Consolidated Statements of Income. For the year ended March 31, 2018, XINGU AGRI AG, a subsidiary in the Lifestyle Segment, recognized an impairment loss of ¥11,288 million in “impairment loss of fixed assets”, of which impairment loss of goodwill is ¥6,437 million and impairment loss of investment properties is ¥4,851 million, by reducing the carrying amount of assets such as the goodwill and the farmland to the recoverable amount of ¥70,470 million. The impairment loss mainly related to a decline in the soybean price and decreased demand for the farmland in the area where the assets are located. The recoverable amount above represents the fair value less costs of disposal, which is based on a valuation conducted by independent valuation appraisers who have recent experience in the locations and categories of the asset being valued, and the fair value is classified as level 3.
Goodwill is allocated to each cash-generating unit (or group of units) for impairment testing of goodwill for the years ended March 31, 2018 and 2017. The goodwill allocated to Mitsui E&P Italia A S.r.l, of which carrying amounts were ¥20,910 million and ¥22,081 million as of March 31, 2018 and 2017, respectively, accounts for a main portion of the goodwill. The recoverable amount is calculated based on the value in use, and is the sum of the net present value of the future cash flow estimated from the production plan for the Tempa Rossa on shore oil field in the Gorgoglione concession in Italy during its useful life. A profit margin which is deemed to be the market average and reflects the risks inherent in the cash-generating unit is used as the discount rate to calculate the value in use.
The key assumptions with the most significant impact on the calculation of the value in use are the production plan and oil price. The production plan used in the valuation has been developed by the operator, Total E&P Italia S.p.A. and approved by the management of Mitsui E&P Italia A S.r.l. The oil price based on the Crude Oil Brent Price is used for impairment testing.
The carrying amount of intangible assets with indefinite useful lives, allocated to cash-generating unit (or group of units) for impairment testing is immaterial in comparison with the companies’ total carrying amount of intangible assets with indefinite useful lives for the years ended March 31, 2018 and 2017.
154 15. EXPLORATION AND EVALUATION FOR MINERAL RESOURCES AND OIL & GAS
Exploration and evaluation assets for mineral resources and oil & gas for the years ended March 31, 2018 and 2017 were as follows: Millions of Yen
2018 2017 Balance at beginning of year ………………………………………… ¥ 82,509 ¥ 100,280 Acquisitions / Additions ……………………………………………… 12,460 4,095 Impairment and write-down of capitalized
exploration expenses ………………………………… (4,254) (4,516) Reclassification ……………………………………………………… (12,174) (15,847) Foreign currency translation ………………………………………… (3,647) (225) Others ………………………………………………………………… (7,031) (1,278) Balance at end of year ………………………………………………… ¥ 67,863 ¥ 82,509
Expenses, cash flows from operating activities and cash flows from investing activities in relation to exploration and evaluation for mineral resources and oil & gas for the years ended March 31, 2018 and 2017 were as follows: Millions of Yen
2018 2017 Exploration and evaluation expenses ………………………………… ¥ (13,196) ¥ (13,426) Cash flows from operating activities ………………………………… (8,360) (10,029) Cash flows from investing activities ………………………………… (4,232) (3,953)
For the year ended March 31, 2017, exploration and evaluation expenses are included in other income (expense)-net in the Consolidated Statements of Income. For the year ended March 31, 2018, exploration and evaluation expenses are included in impairment reversal (loss) of fixed assets-net and other income (expense)-net in the Consolidated Statements of Income. Impairment and write-down of capitalized exploration expenses are included in impairment reversal (loss) of fixed assets-net, while other exploration and evaluation expenses are included in other income (expense)-net.
16. DISCLOSURES ABOUT FINANCIAL AND OTHER TRADE LIABILITIES
(1) Short-term debt
Short-term debt as of March 31, 2018 and 2017 was comprised of the following: Millions of Yen
2018 2017
Interest Interest
rate rate
Short-term bank loans and others …………………… ¥ 201,556 3.6% ¥ 272,449 2.8%
Commercial paper …………………………………… - - 32,114 0.9 Total ………………………………………………… ¥ 201,556 ¥ 304,563
The interest rates represent weighted-average rates in effect as of March 31, 2018 and 2017 regardless of borrowing currencies, though the range of interest rates varies by borrowing currency.
155
(2) Long-term debt
Long-term debt as of March 31, 2018 and 2017 consisted of the following: Millions of Yen
2018 2017 Long-term debt with collateral (Note 17): Banks and insurance companies, maturing serially through 2052—
principally 0.1% to 13.1% ………………………………………… ¥ 24,290 ¥ 31,897 Government-owned banks and government agencies, maturing
serially through 2030—principally 1.8% to 13.2% ………………… 19,901 38,919 Bonds:
Indonesian Rupiah bonds (fixed rate 6.8% to 7.8%, due 3,900 - 2018–2020) …………………………………………………… Total ……………………………………………………………… 48,091 70,816 Long-term debt without collateral: Banks and others (principally insurance companies): Principally 0.0% to 2.6%, maturing serially through 2076 …… 1,727,365 1,907,931 Principally 0.1% to 12.0%, maturing serially through 2032
(payable in foreign currencies) ……………………………… 1,981,723 2,230,570 Bonds and notes: Japanese yen bonds (fixed rate 1.2% to 2.6%, due 2018–
2033) ………………………………………………………… 172,723 172,905 Japanese yen bonds (fixed and floating rate: floating rate 1.8%
to 1.9%, due 2024) ……………………………………… 10,000 10,000
Japanese yen bonds (floating rate 0.3%, due 2017)………… - 15,000 Notes under euro medium-term note programme (fixed and
floating rate: floating rate 1.4% to 2.7% due 2018–2019) …… 15,936 16,829 Finance lease obligations (0.2% to 5.7%, maturing serially
through 2036) ……………………………………………………… 69,541 72,970 Subtotal…………………………………………………………… 3,977,288 4,426,205 Total ………………………………………………………… 4,025,379 4,497,021 Less current portion …………………………………………………… 482,550 388,347 Long-term debt, less current portion ………………………………… ¥ 3,542,829 ¥ 4,108,674
Loans executed for the year ended March 31, 2017 include subordinated syndicated loans of ¥350.0 billion and ¥205.0 billion. The maturity dates are June 15, 2076 and August 15, 2076, respectively. Prepayments will be enabled from June 15, 2023 and August 15, 2028, respectively.
156
(3) Trade and other payables, and other financial liabilities
Trade and other payables, and other financial liabilities as of March 31, 2018 and 2017 consisted of the following: Millions of Yen
2018 2017 Current: Trade and other payables Notes payable-trade ………………………………………………… ¥ 23,057 ¥ 22,821 Accounts payable-trade …………………………………………… 1,080,726 1,026,264 Payables to equity accounted investees …………………………… 38,019 44,032 Accrued expenses …………………………………………………… 122,483 110,590 Other financial liabilities Accounts payable-other …………………………………………… 167,604 180,444 Derivative liabilities ………………………………………………… 103,568 99,072 Other ………………………………………………………………… 29,112 36,470 Total ……………………………………………………………… ¥ 1,564,569 ¥ 1,519,693 Non-current: Other financial liabilities Accounts payable-other …………………………………………… ¥ 23,629 ¥ 35,777 Derivative liabilities ………………………………………………… 47,030 44,525 Other ………………………………………………………………… 32,503 30,987 Total ……………………………………………………………… ¥ 103,162 ¥ 111,289
All financial liabilities, except for derivative liabilities, presented above are measured at amortized cost and there are no financial liabilities measured at FVTPL.
(4) Liquidity risk analysis
Non-derivative financial liabilities
Contractual balances of non-derivative financial liabilities by maturity as of March 31, 2018 and 2017 were as follows: March 31, 2018 Millions of Yen
More than 1 year Within More than 5 and not more Total 1 year years than 5 years Trade and other payables …………………………… ¥ 1,263,446 ¥ 839 ¥ – ¥ 1,264,285 Accounts payable-other …………………………… 167,503 22,364 1,366 191,233 Long-term debt (including current portion) ………… 482,550 1,439,646 2,103,183 4,025,379
March 31, 2017 Millions of Yen
More than 1 year Within More than 5 and not more Total 1 year years than 5 years Trade and other payables …………………………… ¥ 1,198,498 ¥ 4,775 ¥ 434 ¥ 1,203,707 Accounts payable-other …………………………… 180,281 34,741 1,199 216,221 Long-term debt (including current portion) ………… 388,347 1,659,071 2,449,603 4,497,021
157 Derivative instruments
The following tables summarize the result of liquidity analysis of derivative instruments held by the companies. These tables are prepared based on future receipts and payments of derivative instruments. If amounts to be received or paid are not fixed, the disclosed amounts are calculated using interest rates estimated in reference to the yield curve as of March 31, 2018 and 2017.
March 31, 2018 Millions of Yen
More than 1 year Within More than 5 and not more Total 1 year years than 5 years Foreign exchange Receipts …………………… ¥ 30,900 ¥ 23,267 ¥ 17 ¥ 54,184 contracts Payments …………………… (22,451) (31,940) (1,168) (55,559) Interest rate Receipts …………………… 10,190 31,782 41,277 83,249 contracts Payments …………………… (450) (1,202) (448) (2,100) Commodity Receipts …………………… 406,265 25,493 123 431,881 contracts Payments …………………… (400,519) (31,230) (1,115) (432,864)
March 31, 2017 Millions of Yen
More than 1 year Within More than 5 and not more Total 1 year years than 5 years Foreign exchange Receipts …………………… ¥ 38,502 ¥ 24,510 ¥ 7,028 ¥ 70,040 contracts Payments …………………… (26,269) (19,862) (4,816) (50,947) Interest rate Receipts …………………… 9,347 30,954 46,195 86,496 contracts Payments …………………… (1,648) (2,382) (748) (4,778) Commodity Receipts …………………… 344,884 33,019 – 377,903 contracts Payments …………………… (344,979) (32,903) (1,111) (378,993)
The amounts of future payments of other derivative instruments not included in the table above were ¥7,391 within 1 year, ¥11,989 more than 1 year and not more than 5 years and ¥3,495 more than 5 years as of March 31, 2017. The amounts as of March 31, 2018 were immaterial.
158 17. PLEDGED ASSETS
The assets pledged as collateral for certain short-term debt, long-term debt, and payment guarantees, etc. as of March 31, 2018 and 2017 were as follows:
Millions of Yen
2018 2017
Cash and deposits ¥ 54,200 ¥ 73,572
Trade and other receivables, etc. 20,627 73,604 (current and non-current) ……………………………………………… Investments …………………………………………………………… 416,320 506,880 Property, plant and equipment ………………………………………… 23,102 29,632 Others ………………………………………………………………… 86 5,913 Total ………………………………………………………………… ¥ 514,335 ¥ 689,601
Trust receipts issued under customary import financing arrangements (short-term bank loans and bank acceptances) give banks a security interest in the merchandise imported and/or the accounts receivable resulting from the sale of such merchandise. Because of the companies’ large volume of import transactions, it is not practicable to determine the total amount of assets covered by outstanding trust receipts. For this reason, it is not included in the amounts shown in the table above. In addition to the above, the Company has bank borrowings under certain provisions of loan agreements which require the Company, upon the request of the bank, to immediately provide collateral, which is not originally identified in the loan agreements. The Company also has certain bank loan agreements in which default provisions grant sale or possession rights of the pledged assets to lenders.
18. PROVISIONS
The changes in provisions for the year ended March 31, 2018 were as follows: Millions of Yen
Asset retirement Other provisions Total obligation Balance at April 1, 2017 ……………………… ¥ 189,216 ¥ 21,375 ¥ 210,591 Additional provisions recognized …………… 4,946 40,003 44,949 Provisions used ……………………………… (3,580) (4,678) (8,258) Unwinding of discount ……………………… 6,590 － 6,590 Others* ……………………………………… (25,218) 31 (25,187) Balance at March 31, 2018 .………………… ¥ 171,954 ¥ 56,731 ¥ 228,685 * “Others” principally includes the decrease due to estimate change and the effect of changes in foreign currency exchange rates.
Asset retirement obligations are principally related to the costs of dismantling and removing oil and gas production facilities owned by a domestic subsidiary, which has interests in oil and gas operations in Southeast Asia and other areas, and subsidiaries in Australia and Europe, which are engaged in oil and gas producing activities. These expenses are expected to be paid until fifty years; however, they may be affected by future business plans and other circumstances. “Other provisions” includes provision related to Multigrain business, product warranties and rebates of sales, etc. See Note 28 for provision related to Multigrain business.
159 19. EMPLOYEE BENEFITS
The Company and certain subsidiaries have non-contributory and contributory defined benefit pension plans covering substantially all employees other than directors.
The primary pension plan is the Company’s contributory Corporate Pension Fund (“CPF”) under the Defined Benefit Corporate Pension Law. The benefits from CPF are based on the length of service.
Effective April 1, 2006, the Company converted certain portions of CPF into a defined contribution plan and a cash balance plan. The cash balance plan calculates a participant’s benefits using a percentage of the employee’s annual salary and an interest crediting rate.
The Company and certain subsidiaries have unfunded severance indemnity plans. Benefits under the plans are based on the level of compensation at retirement, or earlier termination of employment, and the length of service.
Changes in the defined benefit obligation and the plan assets
The following table sets forth the changes in the companies’ defined benefit obligation and plan assets: Millions of Yen
2018 2017 Change in defined benefit obligation: Defined benefit obligation at beginning of year …………………… ¥ 360,314 ¥ 370,592 Service cost ………………………………………………………… 12,144 11,971 Interest cost ………………………………………………………… 3,174 2,655 Actuarial gain (loss) ………………………………………………… (3,833) (6,604) Benefits paid from plan assets ……………………………………… (15,300) (14,762) Others ……………………………………………………………… (172) (3,538) Defined benefit obligation at end of year ………………………… 356,327 360,314 Change in plan assets: Fair value of plan assets at beginning of year ……………………… 300,416 292,519 Interest income ……………………………………………………… 3,534 3,284 Return on plan assets (excluding interest income) ………………… 10,409 9,775 Contributions by the employer ……………………………………… 6,715 11,017 Benefits paid from plan assets ……………………………………… (15,300) (14,762) Others ……………………………………………………………… 46 (1,417) Fair value of plan assets at end of year …………………………… 305,820 300,416 Net defined benefit liability at end of year …………………………… ¥ (50,507) ¥ (59,898)
Components of net periodic pension costs
Net periodic pension costs of the companies’ defined benefit pension plans for the years ended March 31, 2018 and 2017 included the following components: Millions of Yen
2018 2017 Service cost – benefits earned during the period ……………………… ¥ 12,144 ¥ 11,971 Net interest expense (revenue) ………………………………………… (360) (629) Others ………………………………………………………………… 43 68 Net periodic pension costs ………………………………………… ¥ 11,827 ¥ 11,410
160 Assumptions
The weighted-average assumptions used to determine the companies’ defined benefit obligations as of March 31, 2018 and 2017 are set forth as follows: 2018 2017 Discount rate …………………………………………………………… 0.9% 0.9% Rate of increase in future compensation levels ……………………… 1.0% 1.0%
The companies mainly determine the discount rates each year as of the measurement date based on a review of interest rates associated with high-quality fixed-income corporate bonds.
The rate of increase in future compensation levels was not applied in determining the defined benefit obligation of CPF other than the cash balance plan because the benefit formulas of these plans do not contain factors relating to compensation levels.
The following table illustrates the sensitivity to changes in assumptions for pension plans: Impact of change in assumption on defined benefit
obligation as of March 31, 2018 50 basis point decrease in discount rate ……………………………………………………… ¥24,835 million increase 50 basis point increase in discount rate ……………………………………………………… ¥22,026 million decrease
Plan assets
The Company’s investment objective is to build a high quality portfolio of plan assets. The investment policy is targeted to ensure adequate returns available to provide future payments of pension benefits and severance indemnities. The basic strategy is diversified investment in various asset classes which have different risk return characteristics. The Company sometimes uses derivative instruments to hedge the exposure to changes in the fair value of debt and equity securities, but never uses them for speculation. The subsidiaries’ investment strategies are mainly based on diversified investment, and are targeted to ensure stable and adequate returns to provide future payments of pension benefits over the long term.
The fair value of the companies’ pension plan assets as of March 31, 2018 and 2017 by asset class are set forth as follows: Millions of Yen
2018 2017
Quoted market price Quoted market price
in an active market in an active market
Not Not
Asset Class Available available TOTAL Available available TOTAL Equity financial ¥ 68,111 ¥ 51,730 ¥ 119,841 ¥ 63,924 ¥ 46,543 ¥ 110,467 instruments (Japan) ……………… Equity financial 4,212 28,549 32,761 5,789 30,781 36,570 instruments (non-Japan) ……… Debt securities 4,832 19,773 24,605 1,539 31,666 33,205 (Japan) ………………………… Debt securities 8,447 74,109 82,556 6,719 60,587 67,306 (non-Japan) …………………… Life insurance company - 32,059 32,059 109 33,116 33,225 general accounts ………………… Cash and deposits ……………… 11,820 - 11,820 17,917 - 17,917 Other …………………………… 1,487 691 2,178 - 1,726 1,726 Total ………………………… ¥ 98,909 ¥ 206,911 ¥ 305,820 ¥ 95,997 ¥ 204,419 ¥ 300,416
161 The equity financial instruments above include securities held in the Company’s employee retirement benefit trust. Publicly-traded, equity financial instruments and debt securities are valued using quoted market prices and classified as assets of which a quoted market price in an active market is available. Other equity financial instruments and debt securities are mostly pooled investments managed by trust banks. They are valued using net asset values of the investments calculated by the trust banks based on the fair value of the underlying assets and classified as assets of which a quoted market price in an active market is not available. Life insurance company general accounts are pooled investment portfolios managed by insurance companies with a guaranteed minimum rate of return. Most of them are valued based on the value of the accounts calculated by the insurance companies and classified as assets of which a quoted market price in an active market is not available.
Cash flows
Contributions The companies expect to contribute ¥14,876 million to their defined benefit pension plans for the year ending March 31, 2019. When a funded amount of CPF is less than the minimum funding amount at the end of each annual period, the companies will contribute required amounts to CPF in accordance with the rules of CPF.
Information about the maturity profile The weighted-average duration of the benefit payments for the defined benefit obligation as of March 31, 2018 is 16 years.
Multiemployer plan
Certain subsidiaries participate in a multiemployer defined benefit pension plan, Mitsui & Co. Group Pension Fund (“MGPF”). Employers other than the Company and subsidiaries also participate in MGPF, which is different from single-employer plans in the following respects:
a. Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers. b. If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers. c. If the multiemployer plan is wound up or a participating employer chooses to stop participating in the multiemployer plan, the participating employer may be required to pay the plan an amount based on the underfunded status of the plan when a wind-up or a withdrawal, referred to as a withdrawal liability.
By participating in MGPF, participating employees will receive the additional benefit stipulated by the plan.
In relation to this plan, the amount of contribution was recorded as a retirement benefit cost as though it is a defined contribution plan because sufficient information is not available to enable the entity to account for the plan as a defined benefit plan.
Based on the most recently available information, the funded status of MGPF as of March 31, 2017 and 2016 was as follows: Millions of Yen
2017 2016 Plan assets, net of current payables …………………………………… ¥ 23,244 ¥ 23,154 Actuarial reserve under pension actuarial valuation …………………… 18,759 18,202 Net amount...…………………………………………………………… 4,485 4,952
The amount contributed to MGPF by the subsidiaries constituted a significant portion of the total contribution and included surcharge. MGPF was converted into a defined benefit corporate pension fund with the approval from the Ministry of Health, Labour and Welfare of the Japanese Government in April 2015.
The Company also provides an “Early Retirement Support Plan” to eligible employees, which guarantees, prior to normal retirement age, certain supplemental payments based on preretirement compensation levels.
162 20. EQUITY
(1) Common stock
The number of shares authorized and issued for the years ended March 31, 2018 and 2017 was as follows: Number of shares
2018 2017 Authorized: Common stock – no par value ………………………………………... 2,500,000,000 2,500,000,000 Issued: Balance at beginning of year ………………………………………..... 1,796,514,127 1,796,514,127 Increase (decrease) during the year …………………………………... － － Balance at end of year ………………………………………………... 1,796,514,127 1,796,514,127
The number of treasury stock held as of March 31, 2018 and 2017 included in the number of shares issued shown above was 58,632,655 and 32,558,297 shares, respectively. For the year ended March 31, 2018, the number of shares issued was decreased by 54,168,500 shares dated April 20, 2018 due to cancellation of such number of treasury stock based on the resolution of the meeting of the Board of Directors held on February 2, 2018.
(2) Capital surplus and retained earnings
Capital surplus mainly consist of additional paid-in capital. Changes in capital surplus for the years ended March 31, 2018 and 2017 were as follows:
Millions of Yen
2018 2017 Balance at beginning of year. ………………………………………… ¥ 409,528 ¥ 412,064 Equity transactions with non-controlling interest shareholders: Increase (decrease) due to transfers of owners of parent's ownership 399 693 interests in its subsidiaries to non-controlling interests ……………… Increase (decrease) due to transfers of owners of parent's ownership (23,980) (3,393) interests in its subsidiaries from non-controlling interests …………… Sales of treasury stock (29) － Compensation costs related to stock options………………………… 247 164 Balance at end of year. ………………………………………………… ¥ 386,165 ¥ 409,528
Retained earnings consist of legal reserve and other unappropriated retained earnings.
The Companies Act of Japan stipulates that an amount equal to 10% of distribution from surplus must be appropriated as additional paid-in capital or a legal reserve in retained earnings depending on the equity account charged upon the payment of such distribution until the total aggregate amount of additional paid-in capital and legal reserve in retained earnings equals 25% of the common stock.
Under the Companies Act, the amount available for distribution is calculated based on the amount of capital surplus and retained earnings, exclusive of additional paid-in capital and legal reserve, recorded in the general books of account in accordance with generally accepted accounting principles in Japan. The amount available for distributions from the Company was ¥997,310 million at March 31, 2018.
163 (3) Other components of equity
Changes in other components of equity for the years ended March 31, 2018 and 2017 were as follows: Millions of Yen
2018 2017 Financial Assets Measured at FVTOCI: Balance at beginning of year ………………………………………..... ¥ 204,100 ¥ 80,427 Increase (decrease) during the year …………………………………... 127,906 140,660 Transfer to retained earnings ………………………………………..... (25,095) (16,987) Balance at end of year ………………………………………………... ¥ 306,911 ¥ 204,100 Remeasurements of Defined Benefit Pension Plans: Balance at beginning of year ……………………………………….... ¥ － ¥ － Increase (decrease) during the year ………………………………….. 15,608 15,003 Transfer to retained earnings ……………………………………….... (15,608) (15,003) Balance at end of year ………………………………………………... ¥ － ¥ － Foreign Currency Translation Adjustments: Balance at beginning of year ………………………………………..... ¥ 308,054 ¥ 278,958 Increase (decrease) during the year …………………………………... (146,566) 28,196 Balance at end of year ………………………………………………... ¥ 161,488 ¥ 308,054 Cash Flow Hedges: Balance at beginning of year ……………………………………….... ¥ (26,707) ¥ (42,330) Increase (decrease) during the year …………………………………... 6,343 15,623 Balance at end of year ………………………………………………... ¥ (20,364) ¥ (26,707) Total: Balance at beginning of year ……………………………………….... ¥ 485,447 ¥ 317,955 Increase (decrease) during the year ………………………………….. 3,291 199,482 Transfer to retained earnings ……………………………………….... (40,703) (31,990) Balance at end of year ………………………………………………... ¥ 448,035 ¥ 485,447
(4) Income tax relating to other comprehensive income
Income tax included in each component of other comprehensive income for the years ended March 31, 2018 and 2017 was as follows: Millions of Yen
2018 2017 Items that will not be reclassified to profit or loss: Financial assets measured at FVTOCI. …………………………….... ¥ (47,423) ¥ (55,873) Remeasurements of defined benefit pension plans ………………….. (41) 226 Share of other comprehensive income of investments accounted (1,393) 1,098 for using the equity method ………………………………………….. Total ……………………………………………………………….. ¥ (48,857) ¥ (54,549) Items that may be reclassified subsequently to profit or loss: Foreign currency translation adjustments ……………………………. ¥ (40,810) ¥ 8,231 Cash flow hedges …………………………………………………….. (4,991) (4,035) Share of other comprehensive income of investments accounted...... 13,152 2,898 for using the equity method ………………………………………….. Total ……………………………………………………………….. ¥ (32,649) ¥ 7,094
164 (5) Other comprehensive income included in non-controlling interests
Each component of other comprehensive income included in non-controlling interests for the years ended March 31, 2018 and 2017 was as follows: Millions of Yen
2018 2017 Financial assets measured at FVTOCI. ……………………………… ¥ 1,241 ¥ 1,993 Remeasurements of defined benefit pension plans …………………… (32) 8 Foreign currency translation adjustments ……………………………… (5,663) 207 Cash flow hedges ……………………………………………………… 115 (90) Total ………………………………………………………………… ¥ (4,339) ¥ 2,118
21. EARNINGS PER SHARE
The following is a reconciliation of basic earnings per share attributable to owners of the parent to diluted earnings per share attributable to owners of the parent for the years ended March 31, 2018 and 2017:
2018 2017
Profit Shares Per share Profit Shares Per share (numerator) (denominator) amount (numerator) (denominator) amount
Millions of In Millions of In Yen Yen Yen Thousands Yen Thousands Basic earnings per share ¥ 418,479 1,760,728 ¥ 237.67 ¥ 306,136 1,788,166 ¥ 171.20 attributable to owners of the parent: Effect of dilutive securities: Adjustment of effect of: (52) - (43) - Dilutive securities of associated companies…... Stock options …..…………………………...... - 1,038 - 759 Diluted earnings per share ¥ 418,427 1,761,766 ¥ 237.50 ¥ 306,093 1,788,925 ¥ 171.10 attributable to owners of the parent:
22. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the years ended March 31, 2018 and 2017 consisted of the following:
Millions of Yen
2018 2017 Personnel expenses…………………………………………………… ¥ 297,088 ¥ 283,755 Communication expenses……………………………………………… 45,834 47,412 Traveling expenses…………………………………………………… 29,849 28,109 Provision for doubtful receivables…………………………………… 20,331 9,172 Other…………………………………………………………………… 178,601 170,527 Total………………………………………………………………… ¥ 571,703 ¥ 538,975
Remuneration of the Company’s Directors and Corporate Auditors for the years ended March 31, 2018 and 2017 was ¥1,688 million and ¥1,345 million, respectively.
165 23. INCOME TAXES
Income Taxes in the Consolidated Statements of Income for the year ended March 31, 2018 include the gain of ¥7,070 million mainly due to the reversal of deferred tax assets and liabilities which reflect the lower federal corporate income tax rate set by the "Tax Cuts and Jobs Act" in the US enacted on December 22, 2017.
The reconciliation between the applicable income tax rate in Japan and the effective income tax rate in the consolidated statements of income and comprehensive income for the years ended March 31, 2018 and 2017 was summarized as follows:
%
2018 2017 Applicable income tax rate in Japan………………………….………………………………… 31.0% 31.0% Increases (decreases) in tax rate resulting from: Expenses not deductible for tax purposes and income not taxable-net……………………… 1.5 1.4 Changes in tax rate…………………………………………………………………………... (1.6) 0.0 Tax effects on dividends……………………………………………...……………………… (27.8) (0.1) Changes in assessment for recoverability of deferred tax assets……..……………………… 12.0 0.6 Higher tax rates for resource related taxes……...……………………………….…………… 4.7 3.3 Tax effects on investments accounted for using the equity method……….………………… (8.8) (7.1) Controlled Foreign Company taxation in Japan……………………………………………... 9.4 0.5 Other……………………………………………….………………………………………… (1.5) (0.4) Effective income tax rate…………………………..……………………………………… 18.9% 29.2% (Note) “Controlled Foreign Company taxation in Japan” included in “Other” for the year ended March 31, 2017 is reported separately for the year ended March 31, 2018 due to an increase in materiality. “Differences of tax rates to certain taxable income” reported separately for the year ended March 31, 2017 is included in “Other” for the year ended March 31, 2018 due to a decrease in materiality. In accordance with the above changes, the relevant figures for the year ended March 31, 2017 were reclassified.
The tax effects of significant temporary differences and carryforwards which result in deferred tax assets and liabilities as of March 31, 2018 and 2017 were as follows:
Millions of Yen
2018 2017 Deferred Tax Assets: Retirement benefit liabilities……………………….…………………… ¥ 7,122 ¥ 9,968 Estimated losses………………………………………………………… 16,982 15,043 Fixed assets……………………………………………………...……… 53,491 67,252 Loss carryforwards…………………………………………...………… 91,820 113,443 Foreign currency translation…………………………….……………… 31,461 42,131 Derivatives……………………………………………………………… 3,877 9,664 Other…………………………………….……………………………… 2,758 8,152 Total deferred tax assets………………...…………………………… 207,511 265,653 Deferred Tax Liabilities: Fixed assets……………...……………………………………………… 152,824 182,281 Other investments…….………………………………………………… 244,922 203,013 Undistributed earnings…..……………………………………………… 174,414 224,373 Foreign currency translation……….…………………………………… 43,513 40,783 Derivatives……………………………………………………………… 7,971 - Other……………….…………………………………………………… 1,396 3,968 Total deferred tax liabilities……………..…………………………… ¥ 625,040 ¥ 654,418
Deferred tax assets recognized by taxable entities that have suffered a loss in either the current or preceding period were ¥32,632 million and ¥58,152 million, as of March 31, 2018 and 2017, respectively. Mainly based on expected resource prices, reserve
166 estimation by external institutions and the estimation in consideration of long-term sales agreements, the companies recognize deferred tax assets within a sufficient taxable income during the expiry period of net operating loss carried forward for each country.
The unused tax loss carryforwards and deductible temporary differences for which deferred tax assets were not recognized were ¥2,575,045 million and ¥1,687,313 million as of March 31, 2018 and 2017, respectively.
Taxable temporary differences associated with investments in subsidiaries for which deferred tax liabilities were not recognized were ¥1,807,270 million and ¥1,729,085 million as of March 31, 2018 and 2017, respectively.
The increase and decrease in deferred tax assets and deferred tax liabilities recognized as deferred tax expenses in the consolidated statements of income for the years ended March 31, 2018 and 2017 were as follows:
Millions of Yen
2018 2017 Retirement benefit liabilities…………………….……………………… ¥ (893) ¥ (813) Estimated losses………………………………………………………… 1,863 1,400 Fixed assets……………………...……………………………………… 16,150 (20,896) Loss carryforwards……………...……………………………………… (22,882) 49,363 Other investments...………...…….….….……………………………… (1,416) (3,757) Undistributed earnings…………..……………………………………… 49,362 (59,343) Other…………………………….……………………………………… (1,815) (3,077) Total……………………………..…………………………………… ¥ 40,369 ¥ (37,123)
Unused tax loss carryforwards for which no deferred tax assets have been recognized as of March 31, 2018 and 2017 were ¥666,575 million and ¥675,148 million, respectively. If not utilized, such tax loss carryforwards will expire as follows:
Millions of Yen
2018 2017 Within 5 years…………………………………………………...……… ¥ 115,756 ¥ 130,879 After 5 to 10 years……………………………………………………… 193,045 230,484 After 10 to 15 years………………………..…………………………… 165,431 154,244 After 15 years………………...………………………………………… 192,343 159,541 Total………………………..………………………………………… ¥ 666,575 ¥ 675,148
Income tax expenses in the consolidated statements of income for the years ended March 31, 2018 and 2017 were as follows:
Millions of Yen
2018 2017 Current………………………………………………………..………… ¥ (143,451) ¥ (97,518) Deferred………………………………………………………....……… ¥ 40,369 ¥ (37,123) Total………………………………………………………..………… ¥ (103,082) ¥ (134,641)
Deferred tax expenses or income arising from the write-down and reversal of previously written-down of deferred tax assets related to tax loss carryforwards and temporary differences of the companies for which it is probable that a tax benefit or expense will not be realized were immaterial for the years ended March 31, 2018 and 2017.
167 24. FAIR VALUE MEASUREMENT
IFRS 13 “Fair Value Measurement” defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. IFRS 13 establishes the fair value hierarchy that may be used to measure fair value, which is provided as follows. The companies recognize transfers of assets or liabilities between levels of the fair value hierarchy as of the end of each reporting period when the transfers occur.
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the assets or liabilities, either directly or indirectly. Level 2 inputs include the following:
- Quoted prices for similar assets or liabilities in active markets - Quoted prices for identical or similar assets or liabilities in markets that are not active - Inputs other than quoted prices that are observable for the assets or liabilities - Inputs that are derived principally from or corroborated by observable market data by correlation or other means
Level 3: Unobservable inputs for the assets or liabilities.
(1) Valuation techniques
Primary valuation techniques used for each financial instrument and non-financial asset measured at fair value are as follows:
Trade and other receivables - Trade and other receivables other than measured at amortized cost are measured at fair value. - Trade and other receivables other than measured at amortized cost are measured at fair value principally using the discounted cash flow method and other appropriate valuation techniques considering various assumptions, including expected future cash flows and discount rates reflecting the related risks of the customer. They are classified as level 3, considering the degree to which these inputs are observable in the relevant markets.
Other Investments - Other investments other than measured at amortized cost are measured at fair value. - Publicly-traded other investments are measured using quoted market prices and classified as level 1. - Non-marketable other investments are measured at fair value principally using the discounted cash flow method, the market comparison approach and other appropriate valuation techniques considering various assumptions, including expected future cash flows and discount rates reflecting the related risks of the investee. They are classified as level 3, considering the degree to which these inputs are observable in the relevant markets.
Derivative Instruments - Derivative instruments mainly consist of derivative commodity instruments and derivative financial instruments. - Exchange-traded derivative commodity instruments measured using quoted market prices in an active market are classified as level 1. Certain derivative commodity instruments measured using observable inputs of the quoted prices obtained from markets, financial information providers, and brokers, are classified as level 2. Also, the derivative commodity instruments measured using unobservable inputs are classified as level 3. - Derivative financial instruments are mainly measured by discounted cash flow analysis using foreign exchange and interest rates or quoted prices currently available for similar types of agreements and are classified as level 2.
Inventories - Inventories acquired with the purpose of being sold in the near future and a profit from fluctuations in price are measured at fair value based on quoted prices with certain adjustments and classified as level 2. The amounts of costs to sell as of March 31, 2018 and 2017 were immaterial.
168 (2) Valuation process
The valuation process involved in level 3 measurements for each applicable asset and liability is governed by the model validation policy and related procedures pre-approved by appropriate personnel. Based on the policy and procedures, the personnel determine the valuation model to be utilized to measure each asset and liability at fair value. We engage independent external experts of valuation to assist in the valuation process for certain assets over a specific amount, and their results of valuations are reviewed by the responsible personnel of the Company. All of the valuations, including those performed by the external experts, are reviewed and approved by the responsible personnel of the Company.
(3) Assets and liabilities measured at fair value on a recurring basis
Information by fair value hierarchy
Assets and liabilities measured at fair value on a recurring basis as of March 31, 2018 and 2017 were as follows. No assets or liabilities were transferred between level 1 and 2 for the years ended March 31, 2018 and 2017.
169
Millions of Yen
March 31, 2018 Fair value measurements using Netting Total fair Level 1 Level 2 Level 3 adjustments* value Assets: Trade and other receivables: Loans measured at FVTPL…………………………………… - - ¥ 21,380 Total trade and other receivables - - ¥ 21,380 - ¥ 21,380 Other investments: Financial assets measured at FVTPL………………………… ¥ 24,774 - ¥ 110,827 Financial assets measured at FVTOCI……………………… 1,046,586 - 638,851 Total other investments ¥ 1,071,360 - ¥ 749,678 - ¥ 1,821,038 Derivative assets: Foreign exchange contracts…………………………………… - ¥ 54,191 - Interest rate contracts………………………………………… - 70,121 - Commodity contracts………………………………………… ¥ 10,690 420,030 ¥ 1,116 Others………………………………………………………… - - 15,715 Total derivative assets ¥ 10,690 ¥ 544,342 ¥ 16,831 ¥ (364,135) ¥ 207,728 Inventories………………………………………………………… - ¥ 103,780 - - 103,780 Total assets……………………………………………………… ¥ 1,082,050 ¥ 648,122 ¥ 787,889 ¥ (364,135) ¥ 2,153,926 Liabilities: Derivative liabilities: Foreign exchange contracts…………………………………… - ¥ 55,633 - Interest rate contracts………………………………………… - 3,058 - Commodity contracts………………………………………… ¥ 15,147 417,299 ¥ 613 Others………………………………………………………… - - 13,344 Total derivative liabilities ¥ 15,147 ¥ 475,990 ¥ 13,957 ¥ (354,496) ¥ 150,598 Total liabilities…………………………………………………… ¥ 15,147 ¥ 475,990 ¥ 13,957 ¥ (354,496) ¥ 150,598
Millions of Yen
March 31, 2017 Fair value measurements using Netting Total fair Level 1 Level 2 Level 3 adjustments* value Assets: Trade and other receivables: Loans measured at FVTPL…………………………………… - - ¥ 32,710 Total trade and other receivables - - ¥ 32,710 - ¥ 32,710 Other investments: Financial assets measured at FVTPL………………………… ¥ 21,432 - ¥ 86,352 Financial assets measured at FVTOCI……………………… 579,133 - 646,034 Total other investments ¥ 600,565 - ¥ 732,386 - ¥ 1,332,951 Derivative assets: Foreign exchange contracts…………………………………… - ¥ 69,128 - Interest rate contracts………………………………………… - 68,066 - Commodity contracts………………………………………… ¥ 19,920 356,547 ¥ 546 Others………………………………………………………… - - 3,306 Total derivative assets ¥ 19,920 ¥ 493,741 ¥ 3,852 ¥ (317,426) ¥ 200,087 Inventories………………………………………………………… - ¥ 133,120 - - ¥ 133,120 Total assets……………………………………………………… ¥ 620,485 ¥ 626,861 ¥ 768,948 ¥ (317,426) ¥ 1,698,868 Liabilities: Derivative liabilities: Foreign exchange contracts…………………………………… - ¥ 50,976 - Interest rate contracts………………………………………… - 6,138 - Commodity contracts………………………………………… ¥ 13,161 363,296 ¥ 649 Others………………………………………………………… - - 22,875 Total derivative liabilities ¥ 13,161 ¥ 420,410 ¥ 23,524 ¥ (313,498) ¥ 143,597 Total liabilities…………………………………………………… ¥ 13,161 ¥ 420,410 ¥ 23,524 ¥ (313,498) ¥ 143,597 * Amounts of netting adjustments include the net amount when, and only when, the companies currently have a legally enforceable right to set off the recognized amounts, and intend either to settle on a net basis or to realize the asset and settle the liability simultaneously.
170 Reconciliation of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3)
The balance at the beginning of period of the loan measured at FVTPL was ¥32,710 million and the balance at the end of the period was ¥21,380 million for the year ended March 31, 2018. The purchase amount and the balance of the loan measured at FVTPL for the year ended March 31, 2017 was ¥32,710 million. There was no movement other than its purchase nor net change in unrealized gains (losses) still held at the end of the year.
The reconciliation of financial assets measured at FVTPL for the years ended March 31, 2018 and 2017 were as follows:
Millions of Yen
2018 2017 Balance at beginning of year…………………………………………… ¥ 86,352 ¥ 67,567 Gains (losses)………………………………………………………… (6,847) (6,739) Purchases…………………………………………………………… 34,894 24,147 Sales………………………………………………………………… (8,577) (5,631) Transfers into Level 3……………………………………………… - - Transfers out of Level 3……………………………………………… (250) - Others (Note1)……………………………………………………… 5,255 7,008 Balance at end of year……………………………………………… ¥ 110,827 ¥ 86,352
Net change in unrealized gains (losses) still held at end of year ¥ (6,854) ¥ (6,666)
Note 1: “Others” includes the effect of changes in foreign exchange rates (including foreign currency translation adjustments) and in scope of consolidation.
Gains (losses) related to financial assets measured at FVTPL for the year ended March 31, 2018 were included in “Other revenue” in the Consolidated Statements of Income. Gains (losses) related to financial assets measured at FVTPL for the year ended March 31, 2017 were included in “Gain (loss) on securities and other investments―net” in the Consolidated Statements of Income.
The reconciliation of financial assets measured at FVTOCI for the years ended March 31, 2018 and 2017 were as follows:
Millions of Yen
2018 2017 Balance at beginning of year…………………………………………… ¥ 646,034 ¥ 561,011 Other comprehensive income (Note 1)……………………………… (5,796) 104,125 Purchases…………………………………………………………… 30,887 22,943 Sales………………………………………………………………… (6,173) (19,363) Transfers into Level 3……………………………………………… - - Transfers out of Level 3……………………………………………… - - Others (Note 2)……………………………………………………… (26,101) (22,682) Balance at end of year………………………………………………… ¥ 638,851 ¥ 646,034
Note 1: For “Other comprehensive income” for the year ended March 31, 2018, fair value in investments in LNG projects decreased, mainly due to reflecting the change of future oil price forecast and foreign exchange fluctuation, despite the increase of sales quantity due to revision of business plan. For “Other comprehensive income” for the year ended March 31, 2017, fair value in investments in LNG projects increased reflecting the costs reduction and updates in the discount rate. Note 2: “Others” includes the effect of changes in foreign exchange rates (including in the foreign currency translation adjustments) and in scope of consolidation.
Other comprehensive income related to financial assets measured at FVTOCI was included in “Financial assets measured at FVTOCI” in the Consolidated Statements of Comprehensive Income.
171 Quantitative information about Level 3 fair value measurements
Information about valuation techniques and significant unobservable inputs used for level 3 assets measured at fair value on a recurring basis as of March 31, 2018 and 2017 were as follows:
Principal March 31, 2018 Valuation Technique Range Unobservable Input Financial assets measured at Income approach Discount rate 6.5%~15.1% FVTOCI
Principal March 31, 2017 Valuation Technique Range Unobservable Input Financial assets measured at Income approach Discount rate 5.6%~14.3% FVTOCI
Information about sensitivity to changes in significant unobservable inputs
For recurring fair value measurements of financial assets measured at FVTOCI using the income approach, increases (decreases) in discount rates would result in a lower (higher) fair value.
172 25. CONTINGENT LIABILITIES
Ⅰ. GUARANTEES
The companies provide various types of guarantees for the benefit of third parties and related parties principally to enhance their credit standings, and would be required to execute payments if a guaranteed party failed to fulfill its obligation with respect to a borrowing or trade payable.
The table below summarizes the maximum potential amount of future payments, amount outstanding and recourse provisions/collateral of the companies’ guarantees as of March 31, 2018 and 2017. The maximum potential amount of future payments represents the amount without consideration of possible recoveries under recourse provisions or from collateral held or pledged that the companies could be obliged to pay if there were defaults by guaranteed parties. Such amounts bear no relationship to the anticipated losses on these guarantees and indemnifications and, in the aggregate, they greatly exceed anticipated losses. The companies evaluate risks involved for each guarantee in an internal screening procedure before issuing a guarantee and regularly monitor outstanding positions and record adequate allowance to cover losses expected from probable performance under these agreements. The companies believe that the likelihood to perform guarantees which would materially affect the consolidated financial position, operating results, or cash flows of the companies is remote at March 31, 2018.
Millions of Yen
Maximum Recourse Amount Net amount potential amount provisions/ outstanding outstanding of future Collateral (a) (a)-(b) payments (b) March 31, 2018 Type of guarantees: Financial guarantees Guarantees for third parties…………………… ¥ 94,524 ¥ 57,041 ¥ 6,076 ¥ 50,965 Guarantees for the investments accounted for using the equity method……………………… 903,904 615,804 66,276 549,528 Performance guarantees Guarantees for third parties…………………… 47,924 45,023 6,983 38,040 Guarantees for the investments accounted for using the equity method……………………… 87,040 81,489 2,986 78,503 Total………………………………………… ¥ 1,133,392 ¥ 799,357 ¥ 82,321 ¥ 717,036
Millions of Yen
Maximum Recourse Amount Net amount potential amount provisions/ outstanding outstanding of future Collateral (a) (a)-(b) payments (b) March 31, 2017 Type of guarantees: Financial guarantees Guarantees for third parties…………………… ¥ 113,305 ¥ 66,313 ¥ 5,966 ¥ 60,347 Guarantees for the investments accounted for using the equity method……………………… 825,871 557,606 128,966 428,640 Performance guarantees Guarantees for third parties…………………… 57,308 45,702 4,836 40,866 Guarantees for the investments accounted for using the equity method……………………… 36,171 31,361 3,866 27,495 Total………………………………………… ¥ 1,032,655 ¥ 700,982 ¥ 143,634 ¥ 557,348
173 Guarantees for third parties The companies guarantee, severally or jointly with others, indebtedness of certain customers and suppliers in the furtherance of their trading activities. Most of these guarantees outstanding as of March 31, 2018 and 2017 will expire through 2029 and 2022, respectively.
Guarantees for the investments accounted for using the equity method The companies, severally or jointly with others, issue guarantees for the investments accounted for using the equity method for the purpose of furtherance of their trading activities and enhancement of their credit for securing financing. Most of these guarantees outstanding as of March 31, 2018 and 2017 will expire through 2025.
The table below summarizes the maximum potential amount of future payments for the companies’ guarantees by the remaining contractual period as of March 31, 2018 and 2017.
Millions of Yen
2018 2017 Within 1 year…………………………………………………………… ¥ 303,079 ¥ 433,318 After 1 to 5 years……………………………………………………… 540,359 357,070 After 5 years…………………………………………………………… 289,954 242,267 Total………………………………………………………………… ¥ 1,133,392 ¥ 1,032,655
Ⅱ. LITIGATION
Various claims and legal actions are pending against the companies in respect of contractual obligations and other matters arising out of the conduct of the companies’ business. Appropriate provision has been recorded for the estimated loss on claims and legal actions. In the opinion of management, any additional liabilities will not materially affect the consolidated financial position, operating results, or cash flows of the companies.
26. SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash investing and financing activities for the years ended March 31, 2018 and 2017 were as follows:
Millions of Yen
2018 2017 Exchange of shares in connection with business combinations and reorganizations involving investees: Fair value of Vale shares received…………………………… ¥ 307,072 - Carrying amount of Valepar shares surrendered……………… ¥ 247,484 -
The changes in liabilities arising from financing activities for the year ended March 31, 2018 were as follows: Millions of Yen Non-cash changes
Balance at Balance at Cash flows Foreign exchange March 31, 2017 Others March 31, 2018 movement Short-term debt……… ¥ 304,563 ¥ (99,045) ¥ (3,042) ¥ (920) ¥ 201,556 Long-term debt……… 4,497,021 (351,218) (113,527) (6,897) 4,025,379 Total……………… ¥ 4,801,584 ¥ (450,263) ¥ (116,569) ¥ (7,817) ¥ 4,226,935
Note: Long-term debt include "Current portion of long-term debt" and "Long-term debt, less current portion" of Consolidated Statements of Financial Position.
174 27. THE INCORPORATION OF VALEPAR S.A.
We had 15% share in Valepar S.A. (“Valepar”), a holding company of Vale S.A. (“Vale”). We had agreed that 1) conversion of Vale's preferred shares to common shares, 2) amendment to Vale bylaw and 3) incorporation of Valepar by Vale was to be executed subject to approval at Vale's extraordinary shareholders meeting and consent of at least 54.09% to the conversion of Vale's preferred shares to common shares, and Valepar was incorporated by Vale on August 14, 2017. Through this incorporation, the companies recognized ¥56,296 million of profit from the difference between its book value of Valepar's shares and the fair value of its newly acquired Vale shares and ¥35,204 million of the profit due to the reversal of deferred tax liabilities. A loss of ¥2,169 million was included in Profit (Loss) of equity method investments for the three-month period ended September 30, 2017 and a gain of ¥9,444 million was included in Profit (Loss) of equity method investments for the year ended March 31, 2018. The profit (loss) belongs to Mineral & Metal Resources segment for the year ended March 31, 2018. Please see to Note 7 " SEGMENT INFORMATION.” ¥260,238 million of book value of Valepar was included in the Investments accounted for using equity method on Consolidated Statements of Financial Position for the year ended March 31, 2017. Through this incorporation, the company acquired ¥307,072 million in share of Vale and ¥388,377 million is included in Other investment (financial assets measured at FVTOCI) on Consolidated Statement of Financial Position for the year ended March 31, 2018.
28. PROVISION RELATED TO MULTIGRAIN BUSINESS
Multigrain Trading AG (“Multigrain” a 100% owned subsidiary of the Company), which is engaged in origination and merchandising of agricultural products in Brazil, has concluded several long-term contracts mainly related to the export trading business of soybean and corn. Due to the recent deterioration of the business environment, losses of ¥25,006 million expected to arise from meeting the obligations under some of the contracts have been recognized for the year ended March 31, 2018. According to IAS 37, the corresponding provisions were measured based on the unavoidable costs under the contracts that reflect the least net cost of exiting from the contracts, which is the lower of the costs of fulfilling them and the costs arising from failure to fulfill them. Regarding to amounts of these estimations, the costs of meeting the obligations and expected benefits under the contracts depend on changes of the margin on the business of origination and merchandising of agricultural products in future, while the costs arising from failure of fulfilment depend on negotiations with the counterparties of the contracts. Among the contracts, the longest expected timing of outflows related to these provisions is 8 years. Regarding to one of these contracts, the probability to reach its termination was high and it was reflected in the estimate of provisions. Such provisions are presented as “Provisions” within the Consolidated Statements of Financial Position, and the related losses are presented as “Provision related to Multigrain business” within the Consolidated Statements of Income respectively. The losses are also included in the “Profit (Loss) for the Period Attributable to Owners of the parent” in the Lifestyle segment for the year ended March 31, 2018. Please see Note 7 “SEGMENT INFORMATION”.
29. SUBSEQUENT EVENTS
Dividend On June 21, 2018, the shareholders approved the payment of a cash dividend to shareholders as of March 31, 2018 of ¥40 per share or a total of ¥69,516 million at the Company’s Ordinary General Meeting of Shareholders.
30. AUTHORIZATION OF THE ISSUE OF CONSOLIDATED FINANCIAL STATEMENTS
The issuance of the consolidated financial statements was authorized by Tatsuo Yasunaga, Representative Director, President and CEO, and Takakazu Uchida, Representative Director, Executive Managing Officer and CFO, on June 21, 2018.
175 2. Others
Quarterly data for the year ended March 31, 2018
Millions of Yen, Except Amounts per Share
Nine-month Six-month Three-month Year ended period ended period ended period ended March 31, 2018 December 31, September 30, June 30, 2017 2017 2017 Revenue...... ¥4,892,149 ¥3,653,010 ¥2,394,033 ¥1,181,660 Profit before Income Taxes...... 544,384 475,040 312,031 153,924 Profit for the Period (Year) Attributable to Owners of the Parent...... 418,479 376,834 238,307 110,756 Basic Earnings per Share Attributable to Owners of the Parent (Yen)...... ¥237.67 ¥213.63 ¥135.10 ¥62.79
Three-month Three-month Three-month Three-month period ended period ended period ended period ended December 31, September 30, March 31, 2018 June 30, 2017 2017 2017 Basic Earnings per Share Attributable to Owners of the Parent (Yen)...... ¥24.04 ¥78.53 ¥72.31 ¥62.79
Significant litigation See Note 25, “CONTINGENT LIABILITIES.”
176 6. Outline Regarding the Administration of Mitsui’s Stock
Fiscal Year From April 1 to March 31
Ordinary general meeting of shareholders During June
Record date March 31 September 30 Record dates for dividends of surplus March 31 Number of shares in one trading unit 100 shares Buyback and increase in holdings of shares
less than one unit (Special account) Sumitomo Mitsui Trust Bank, Limited Place of handling Stock Transfer Agency Business Planning Dept. 4-1, Marunouchi 1-chome, Chiyoda-ku, Tokyo (Special account) Administrator of shareholder registry Sumitomo Mitsui Trust Bank, Limited 4-1, Marunouchi 1-chome, Chiyoda-ku, Tokyo Forwarding office ------
Fees for buyback and increase in holdings Amount equivalent to fees for entrusting sale or purchase of stock Mitsui carries out its public notifications by means of electronic public notice. http://www.mitsui.com/jp/ja/koukoku/ However, in the event of an accident which makes electronic notice not Method of giving public notice possible, or the occurrence of similar circumstances which cannot be controlled, public notification shall be posted in the Nihon Keizai Shimbun (the Nikkei Newspaper). Shareholder privileges Not applicable (Note) Public notice of book closing is not included in the public notices shown in “Method of giving public notice.”
177 7. Reference Information on Mitsui
1. Information on the Parent Company
Mitsui does not have a parent company.
2. Other Reference Information
Mitsui filed the following reports, originally written in Japanese, between the beginning of the fiscal year ended March 31, 2018 and the issuance date (June 21, 2018) of the original Japanese version of this Annual Securities Report.
(1) Annual Securities Report
Fiscal year (the 98th) From April 1, 2016 to March 31, 2017 Submitted to the Director-General of the Kanto Local Finance Bureau, Japan, on June 21, 2017
(2) Related to Quarterly Securities Reports
Quarterly Securities Reports and Confirmation Notes
(The 1st quarter of 99th period) (From April 1, 2017 to June 30, 2017) Submitted to the Director-General of the Kanto Local Finance Bureau, Japan, on August 10, 2017
(The 2nd quarter of 99th period) (From July 1, 2017 to September 30, 2017) Submitted to the Director-General of the Kanto Local Finance Bureau, Japan, on November 13, 2017
(The 3rd quarter of 99th period) (From October 1, 2017 to December 31, 2017) Submitted to the Director-General of the Kanto Local Finance Bureau, Japan, on February 13, 2018
(3) Internal Control Report
Fiscal Year (the 98th) (From April 1, 2016 to March 31, 2017) Submitted to the Director-General of the Kanto Local Finance Bureau, Japan, on June 21, 2017
(4) Extraordinary Report
Submitted to the Director-General of the Kanto Local Finance Bureau, Japan, on June 22, 2017 Under the provisions of Article 24-5, Paragraph 4, of the Financial Instruments and Exchange Act and Article 19, Paragraph 2, Item 9-2 (resolutions of matters resolved at the General Meeting of Shareholders), of the Cabinet Office Ordinance on Disclosure of Corporate Information, etc.
Submitted to the Director-General of the Kanto Local Finance Bureau, Japan, on August 15, 2017 Under the provisions of Article 24-5, Paragraph 4, of the Financial Instruments and Exchange Act and Article 19, Paragraph 2, Item 12 (an event which may have serious effects on the financial position, operating results and cash flow status), of the Cabinet Office Ordinance on Disclosure of Corporate Information, etc.
Submitted to the Director-General of the Kanto Local Finance Bureau, Japan, on January 23, 2018 Under the provisions of Article 24-5, Paragraph 4, of the Financial Instruments and Exchange Act and Article 19, Paragraph 2, Item 9 (change in Representative Directors), of the Cabinet Office Ordinance on Disclosure of Corporate Information, etc.
Submitted to the Director-General of the Kanto Local Finance Bureau, Japan, on January 26, 2018 Under the provisions of Article 24-5, Paragraph 4, of the Financial Instruments and Exchange Act and Article 19, Paragraph 2, Item 3 (transfer of specified subsidiary), of the Cabinet Office Ordinance on Disclosure of Corporate Information, etc.
Submitted to the Director-General of the Kanto Local Finance Bureau, Japan, on April 5, 2018
178 Under the provisions of Article 24-5, Paragraph 4, of the Financial Instruments and Exchange Act and Article 19, Paragraph 2, Item 3 (transfer of specified subsidiary), of the Cabinet Office Ordinance on Disclosure of Corporate Information, etc.
(5) Shelf Registration Statement (corporate bonds)
1) Amended Shelf Registration Statement
Submitted to the Director-General of the Kanto Local Finance Bureau, Japan, on June 22, 2017 Submitted to the Director-General of the Kanto Local Finance Bureau, Japan, on August 15, 2017 Submitted to the Director-General of the Kanto Local Finance Bureau, Japan, on January 23, 2018 Submitted to the Director-General of the Kanto Local Finance Bureau, Japan, on January 26, 2018 Submitted to the Director-General of the Kanto Local Finance Bureau, Japan, on April 5, 2018
(6) Related to Share Buyback Report
1) Share Buyback Report
(From February 1, 2018 to February 28, 2018) Submitted to the Director-General of the Kanto Local Finance Bureau, Japan, on March 14, 2018 (From March 1, 2018 to March 31, 2018) Submitted to the Director-General of the Kanto Local Finance Bureau, Japan, on April 12, 2018
179
Management’s Annual Report on Internal Control over Financial Reporting (Translation)
NOTE TO READERS
Following is an English translation of management’s report on internal control over financial reporting filed under the Financial Instruments and Exchange Act of Japan. This report is presented merely as supplemental information.
1. Matters Relating to the Basic Framework for Internal Control over Financial Reporting
Tatsuo Yasunaga, Representative Director, President and CEO, and Takakazu Uchida, Representative Director, Executive Managing Officer and CFO, are responsible for designing and operating effective internal control over financial reporting of Mitsui & Co., Ltd. (“the Company”), and have designed and operated internal control over financial reporting in accordance with the basic framework for internal control set forth in “On the Revision of the Standards and Practice Standards for Management Assessment and Audit concerning Internal Control Over Financial Reporting(Council Opinions)” published by the Business Accounting Council.
The internal control is designed to achieve its objectives to the extent reasonable through the effective function and combination of its basic elements. Therefore, there is a possibility that misstatements may not be completely prevented or detected by internal control over financial reporting.
2. Matters Relating to Scope of Assessment, the Assessment Date, and Assessment Procedures
The assessment of internal control over financial reporting was performed as of March 31, 2018. The assessment was performed in accordance with assessment standards for internal control over financial reporting generally accepted in Japan.
In conducting this assessment, we evaluated internal controls which may have a material effect on the entire financial reporting in a consolidation (“company-level controls”) and based on the result of this assessment, we appropriately selected business processes to be evaluated, analyzed these selected business processes, identified key controls that may have a material impact on the reliability of our financial reporting, and assessed the design and operation of these key controls. These procedures have allowed us to evaluate the effectiveness of its internal controls.
We determined the required scope of assessment of internal control over financial reporting for the Company, as well as its consolidated subsidiaries and equity-method affiliated companies, from the perspective of the materiality that may affect the reliability of our financial reporting. The materiality that may affect the reliability of the financial reporting is determined taking into account the materiality of quantitative and qualitative impacts. We confirmed that we had reasonably determined the scope of assessment of internal controls over business processes in light of the results of assessment of company-level controls conducted for the Company, its consolidated subsidiaries and equity-method affiliated companies. We did not include those consolidated subsidiaries and equity-method affiliated companies which do not have any quantitatively or qualitatively material impact on the consolidated financial statements in the scope of assessment of company-level controls.
Regarding the scope of assessment of internal control over business processes, we accumulated business units in descending order of total asset (before elimination of intercompany accounts) and income before income taxes (before elimination of intercompany accounts) for the prior fiscal year, and those business units whose combined amount of total assets reaches approximately 70% of total assets on a consolidated basis and those business units whose combined amount of income before income taxes reaches approximately 70% of consolidated income before income taxes on a consolidated basis were selected as “significant business units.”
At the selected significant business units, we included, in the scope of assessment, (1) those business processes leading to sales or revenue, accounts receivable and inventories, and those leading to investments and loans, as significant accounts that may have a material impact on the business objectives of us, and (2) those business processes leading to other quantitatively material accounts. Further, not only at selected significant business units, but also at other business units, we added to the scope of assessment, as business processes having greater materiality considering their impact on the financial reporting, (1) those business processes relating to greater likelihood of material misstatements and significant account involving estimates and the management’s judgment, and (2) those business processes relating to businesses or operations dealing with high-risk transactions.
3. Matters Relating to the Results of the Assessment
As a result of the assessment above, we concluded that our internal control over financial reporting was effective as of March 31, 2018.
4. Supplementary Matters
Not applicable.
5. Special Information
Not applicable.
Independent Auditor's Report (filed under the Financial Instruments and Exchange Act of Japan)
NOTE TO READERS:
Following is an English translation of the Independent Auditor's Report filed under the Financial Instruments and Exchange Act of Japan. This report is presented merely as supplemental information.
(TRANSLATION)
INDEPENDENT AUDITOR'S REPORT (filed under the Financial Instruments and Exchange Act of Japan)
June 21, 2018
To the Board of Directors of Mitsui & Co., Ltd. (Mitsui Bussan Kabushiki Kaisha):
Deloitte Touche Tohmatsu LLC
Designated Unlimited Liability Partner, Engagement Partner, Certified Public Accountant: Yoshio Sato
Designated Unlimited Liability Partner, Engagement Partner, Certified Public Accountant: Takashi Kitamura
Designated Unlimited Liability Partner, Engagement Partner, Certified Public Accountant: Michiyuki Yamamoto
Designated Unlimited Liability Partner, Engagement Partner, Certified Public Accountant: Takenao Ohashi
Audit of Financial Statements
Pursuant to the first paragraph of Article 193-2 of the Financial Instruments and Exchange Act, we have audited the consolidated financial statements included in the Financial Section, namely, the consolidated statement of financial position as of March 31, 2018 of Mitsui & Co., Ltd. (the "Company") and its consolidated subsidiaries, and the consolidated statements of income, comprehensive income, changes in equity and cash flows for the fiscal year from April 1, 2017 to March 31, 2018, including notes to consolidated financial statements.
Management's Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards pursuant to the provisions of Article 93 of the Ordinance on Terminology, Forms and Preparation Methods of Consolidated Financial Statements, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in Japan. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Audit Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company and its consolidated subsidiaries as of March 31, 2018, and the results of their operations and their cash flows for the year then ended in accordance with International Financial Reporting Standards.
Audit of Internal Control
Pursuant to the second paragraph of Article 193-2 of the Financial Instruments and Exchange Act, we have audited management's report on internal control over financial reporting of the Company as of March 31, 2018.
Management's Responsibility for the Report on Internal Control
The Company's management is responsible for designing and operating effective internal control over financial reporting and for the preparation and fair presentation of its report on internal control in accordance with assessment standards for internal control over financial reporting generally accepted in Japan. There is a possibility that misstatements may not be completely prevented or detected by internal control over financial reporting.
Auditor's Responsibility
Our responsibility is to express an opinion on management's report on internal control based on our internal control audit as independent position. We conducted our internal control audit in accordance with auditing standards for internal control over financial reporting generally accepted in Japan. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether management's report on internal control is free from material misstatement.
An internal control audit involves performing procedures to obtain audit evidence about the results of the assessment of internal control over financial reporting in management's report on internal control. The procedures selected depend on the auditor's judgment, including the significance of effects on reliability of financial reporting. An internal control audit includes examining representations on the scope, procedures and results of the assessment of internal control over financial reporting made by management, as well as evaluating the overall presentation of management's report on internal control.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, management's report on internal control over financial reporting referred to above, which represents that the internal control over financial reporting of the Company as of March 31, 2018 is effectively maintained, presents fairly, in all material respects, the results of the assessment of internal control over financial reporting in accordance with assessment standards for internal control over financial reporting generally accepted in Japan.
Interest
Our firm and the engagement partners do not have any interest in the Company for which disclosure is required under the provisions of the Certified Public Accountants Act.
The above represents a translation, for convenience only, of the original report issued in the Japanese language.